RULE 497(b)
Registration No. 33-41462
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California Daily Tax Free Income Fund, Inc.
Connecticut Daily Tax Free Income Fund, Inc.
Daily Tax Free Income Fund, Inc.
Florida Daily Municipal Income Fund
Institutional Daily Income Fund
Michigan Daily Tax Fee Income Fund, Inc.
New Jersey Daily Municipal Income Fund, Inc.
New York Daily Tax Free Income Fund, Inc.
North Carolina Daily Municipal Income Fund, Inc.
Pennsylvania Daily Municipal Income Fund
Short Term Income Fund, Inc.
(collectively the "Funds" and individually the "Fund")
600 Fifth Avenue, New York, NY 10020
(212) 830-5200
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SUPPLEMENT DATED OCTOBER 12, 1995
Reich & Tang Asset Management L.P., the Fund's investment advisor, is a
wholly-owned subsidiary of New England Investment Companies, L.P. ("NEIC"). New
England Mutual Life Insurance Company ("The New England") owns NEIC's sole
general partner and a majority of the limited partnership interest in NEIC. The
New England and Metropolitan Life Insurance Company ("MetLife") have entered
into an agreement to merge, with MetLife to be the survivor of the merger. The
merger is conditioned upon, among other things, approval by the policyholders of
The New England and MetLife and receipt of certain regulatory approvals. The
merger is not expected to occur until after December 31, 1995.
The merger of The New England into MetLife will constitute an "assignment" of
the existing investment advisory agreement relating to the Fund. Under the
Investment Company Act of 1940, such an "assignment" will result in the
automatic termination of the investment advisory agreement, effective at the
time of the merger. Prior to the merger, shareholders of the Fund will be asked
to approve a new investment advisory agreement, intended to take effect at the
time of the merger. The new agreement will be substantially similar to the
existing agreement. A proxy statement describing the new agreement will be sent
to shareholders of the Fund prior to their being asked to vote on the new
agreement.
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NORTH CAROLINA 600 Fifth Avenue
DAILY MUNICIPAL New York, N.Y. 10020
INCOME FUND, INC. (212) 830-5220
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PROSPECTUS
January 2, 1996
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company that is a short-term,
tax-exempt, money market fund whose investment objectives are to seek as high a
level of current income exempt from Federal income taxes and to the extent
possible from North Carolina income taxes, as is believed to be consistent with
preservation of capital, maintenance of liquidity and stability of principal.
The Fund offers two classes of shares to the general public. The Class A shares
of the Fund are subject to a service fee pursuant to the Fund's Rule 12b-1
Distribution and Service Plan and are sold through financial intermediaries who
provide servicing to Class A shareholders for which they receive compensation
from the Manager and the Distributor. The Class B shares of the Fund are not
subject to a service fee and either are sold directly to the public or are sold
through financial intermediaries that do not receive compensation from the
Manager or Distributor. In all other respects, the Class A and Class B shares
represent the same interests in the income and assets of the Fund. No assurance
can be given that those objectives will be achieved.
This Prospectus sets forth concisely the information about the Fund that
prospective investors will find helpful in making their investment decisions. A
Statement of Additional Information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request and without
charge by calling or writing the Fund at the above address. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
Reich & Tang Asset Management L.P. acts as investment manager of the Fund
and Reich & Tang Distributors L.P. acts as distributor of the Fund's shares.
Reich & Tang Asset Management L.P. is a registered investment adviser. Reich &
Tang Distributors L.P. is a registered broker-dealer and member of the National
Association of Securities Dealers, Inc.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE FUND INTENDS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE ALTHOUGH THERE CAN BE NO ASSURANCE THAT THIS VALUE WILL BE MAINTAINED.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THIS PROSPECTUS SHOULD BE READ AND RETAINED BY INVESTORS FOR FUTURE REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Annual Fund Operating Expenses
(as a percentage of average net assets)
<S> <C> <C>
Class A shares Class B shares
Management Fees (After Fee Waiver) 0.38% 0.38%
12b-1 Fees 0.25% 0.00%
Other Expenses 0.17% 0.17%
Administration Fees (After Fee Waiver) 0.00% 0.00%
Total Fund Operating ----- -----
Expenses (After Fee Waiver) 0.80% 0.55%
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following on a $1,000 investment, assuming 5% annual return
(cumulative through the end of each year):
Class A $8 $26 $44 $99
Class B $6 $18 $31 $69
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses an investor in the Fund will bear directly or
indirectly. For a further discussion of these fees see "Management of the Fund"
and "Distribution and Service Plan" herein. The Manager has voluntarily waived a
portion of the Management Fees and all of the Administrative Fees with respect
to both Class A and Class B shares. Absent such waivers, the Management Fees
would have been .40% and the Administrative Fees would have been .21% for the
Class A and Class B shares. The Total Operating Expenses for the Class A and
Class B Shares would have been 1.02% and .77%, respectively, absent the
respective fee waivers.
THE FIGURES REFLECTED IN THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN ABOVE.
</TABLE>
2
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<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(for a share outstanding throughout the period)
The following financial information of the Class A shares of North Carolina
Daily Municipal Income Fund, Inc. has been examined by McGladrey & Pullen LLP
Independent Certified Public Accountants whose name thereon appears in the
Statement of Additional Information and may be obtained by shareholders upon
request.
<S> <C> <C> <C> <C> <C>
December 12, 1994 September 10, 1991
Year (Commencement Year Year (Commencement
Ended of Operations) to Ended Ended of Operations) to
August 31, 1995 August 31, 1995 August 31, 1994 August 31, 1993 August 31, 1992
--------------- --------------- ----------- ------------- ---------------
Class A Class B
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income................. .030 .024 0.018 0.019 0.030
Less distributions:
Dividends (from net investment income) (.030) (.024) (0.018) (0.019) (0.030)
------ ------- ------- -------- -------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return.......................... 3.04% 3.48%* 1.86% 1.94% 3.07%*
Ratios Supplemental/Data
Net assets, end of period (000)....... $164,256 $ -0- $122,820 $ 93,294 $ 75,417
Ratios to average net assets:
Expenses.............................. .78%+ .51%*++ .75%+ 0.71% 0.50%*+
Net investment income................. 3.01%+ 3.40%*++ 1.85%+ 1.91%+ 2.82%*+
* Annualized.
+ Net of management, shareholder servicing and administration fees waived
equivalent to .24%, .29%, .35% and .62% of average net assets for Class
A in 1995 and for the Fund in years 1994, 1993 and 1992, respectively.
++ Net of management and administration fee equivalent to .20%.
</TABLE>
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INTRODUCTION
North Carolina Daily Municipal Income Fund, Inc. (the "Fund") is a
non-diversified, open-end, management investment company that is a short-term,
tax-exempt money market fund whose investment objectives are to seek as high a
level of current income exempt under current law, in the opinion of bond counsel
to the issuer at the date of issuance, from Federal income tax, and, to the
extent possible, from North Carolina income taxes, as is believed to be
consistent with preservation of capital, maintenance of liquidity and stability
of principal by investing principally in short-term, high quality debt
obligations of the State of North Carolina, Puerto Rico and other United States
territories, and their political subdivisions as described under "Investment
Objectives, Policies and Risks" herein. The Fund also may invest in municipal
securities of issuers located in states other than North Carolina, the interest
income on which will be, in the opinion of bond counsel to the issuer at the
date of issuance, exempt from Federal income tax, but will be subject to North
Carolina income taxes for North Carolina residents.
Interest on certain municipal securities purchased by the Fund may be a
preference item for purposes of the Federal alternative minimum tax. The Fund
seeks to maintain an investment portfolio with a dollar-weighted average
maturity of 90 days or less, and to value its investment portfolio at amortized
cost and maintain a net asset value of $1.00 per share, although there can be no
assurance that this value will be maintained. The Fund intends to invest all of
its assets in tax-exempt obligations; however, it reserves the right to invest
up to 20% of its assets in taxable obligations. This is a summary of the Fund's
fundamental investment policies which are set forth in full under "Investment
Objectives, Policies and Risks" herein and in the Statement of Additional
Information and may not be changed without approval of a majority of the Fund's
outstanding shares. Of course, no assurance can be given that these objectives
will be achieved.
The Fund's investment adviser is Reich & Tang Asset Management L.P. (the
"Manager"), which is a registered investment adviser and which currently acts as
investment manager or administrator to fifteen other open-end management
investment companies. The Fund's shares are distributed through Reich & Tang
Distributors L.P. (the "Distributor"), with whom the Fund has entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only) pursuant to the Fund's distribution and
service plan adopted under Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act"). (See "Distribution and Service Plan" herein.)
On any day on which the New York Stock Exchange, Inc. is open for trading
("Fund Business Day"), investors may, without charge by the Fund, purchase and
redeem shares of the Fund's common stock at their net asset value next
determined after receipt of the order. An investor's purchase order will be
accepted after the payment is converted into Federal funds, and shares will be
issued as of the Fund's next net asset value determination which is made as of
12 noon on each Fund Business Day. (See "How to Purchase and Redeem Shares" and
"Net Asset Value" herein.) Dividends from accumulated net income are declared by
the Fund on each Fund Business Day.
The Fund generally pays interest dividends monthly. Net capital gains, if
any, will be distributed at least annually, and in no event later than 60 days
after the end of the Fund's fiscal year. All dividends and distributions of
capital gains are automatically invested in additional shares of the same Class
of the Fund unless a shareholder has elected by written notice to the Fund to
receive either of such distributions in cash. (See "Dividends and Distributions"
herein.)
The Fund intends that its investment portfolio may be concentrated in North
Carolina Municipal Obligations and bank participation certificates
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therein. Investment in the Portfolio should be made with an understanding of the
risks which an investment in North Carolina Municipal Obligations may entail.
Payment of interest and preservation of capital are dependent upon the
continuing ability of North Carolina issuers and/or obligators of state,
municipal and public authority debt obligations to meet their obligations
thereunder. Investors should also consider the greater risk of the Portfolio's
concentration versus the safety that comes with a less concentrated investment
portfolio. A brief summary of risk factors affecting the State of North Carolina
is set forth under "Investment Objectives, Policies and Risks" herein and "North
Carolina Risk Factors" in the Statement of Additional Information.
The Fund's Board of Directors is authorized to divide the unissued shares
into separate series of stock, one for each of the Fund's separate investment
portfolios that may be created in the future.
INVESTMENT OBJECTIVES, POLICIES
AND RISKS
The Fund is a non-diversified, open-end, management investment company that is a
short-term, tax-exempt money market fund whose investment objectives are to seek
as high a level of current income exempt from Federal income tax and, to the
extent possible, from North Carolina income taxes, as is believed to be
consistent with the preservation of capital, maintenance of liquidity and
stability of principal. There can be no assurance that the Fund will achieve its
investment objectives.
The Fund's assets will be invested primarily (i.e., at least 80%) in high
quality debt obligations issued by or on behalf of the State of North Carolina,
other states, territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which is, in the opinion of bond counsel to the issuer at the date
of issuance, currently exempt from regular Federal income taxation ("Municipal
Obligations") and in participation certificates (which, in the opinion of Battle
Fowler LLP, counsel to the Fund, cause the Fund to be treated as the owner of
the underlying Municipal Obligations for Federal income tax purposes) in
Municipal Obligations purchased from banks, insurance companies or other
financial institutions. Dividends paid by the Fund which are "exempt-interest
dividends" by virtue of being properly designated by the Fund as derived from
Municipal Obligations and participation certificates in Municipal Obligations
will be exempt from regular Federal income tax provided the Fund complies with
Section 852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").
Although the Supreme Court has determined that Congress has the authority
to subject the interest on bonds such as the Municipal Obligations to regular
Federal income taxation, existing law excludes such interest from regular
Federal income tax. However, "exempt-interest dividends" may be subject to the
Federal alternative minimum tax. Securities, the interest income on which may be
subject to the Federal alternative minimum tax (including participation
certificates in such securities), may be purchased by the Fund without limit.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends paid by
the Fund correctly identified by the Fund as derived from obligations issued by
or on behalf of the State of North Carolina or any North Carolina local
governments, or their instrumentalities, authorities or districts ("North
Carolina Municipal Obligations") will be exempt from the North Carolina Income
Tax. Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as other types of
obligations that North Carolina is prohibited from taxing under the
Constitution, the laws of the
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United States of America or the laws of North Carolina Constitution
("Territorial Municipal Obligations") also should be exempt from the North
Carolina Income Tax provided the Fund complies with North Carolina law. (See
"North Carolina Income Taxes" herein.) To the extent suitable North Carolina
Municipal Obligations are not available for investment by the Fund, the Fund may
purchase Municipal Obligations issued by other states, their agencies and
instrumentalities, the dividends on which will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the North Carolina Income Tax. However, except as a temporary
defensive measure during periods of adverse market conditions as determined by
the Manager, the Fund will invest at least 65% of its total assets in North
Carolina Municipal Obligations, although the exact amount of the Fund's assets
invested in such securities will vary from time to time. As a temporary
defensive measure the Fund may invest in any security that would otherwise be
permissible for inclusion in the portfolio of the Fund without limitation. The
Fund's investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its total assets in securities, the interest income on
which is subject to Federal, state and local income tax. The kinds of taxable
securities in which the Fund may invest are limited to the following short-term,
fixed income securities (maturing in 397 days or less from the time of
purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities, (2) commercial paper meeting the definition of
Eligible Securities (as defined herein) at the time of acquisition; (3)
certificates of deposit of domestic banks with assets of $1 billion or more; and
(4) repurchase agreements with respect to any Municipal Obligations or other
securities which the Fund is permitted to own. The Fund will invest more than
25% of its assets in participation certificates purchased from banks in
industrial revenue bonds and other North Carolina Municipal Obligations.
In view of this "concentration" in bank participation certificates in North
Carolina Municipal Obligations, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail which include extensive governmental regulations,
changes in the availability and cost of capital funds, and general economic
conditions (see "Variable Rate Demand Instruments and Participation
Certificates" in the Statement of Additional Information) which may limit both
the amounts and types of loans and other financial commitments which may be made
and interest rates and fees which may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations under a letter of credit. The Fund may invest 25% or more of the net
assets of the Fund in securities that are related in such a way that an
economic, business or political development or change affecting one of the
securities would also affect the other securities including, for example,
securities the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the same state. The
investment objectives of the Fund described in the preceding paragraphs of this
section may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund that would be affected by such a change. As used
in this Prospectus, the term "majority of the
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<PAGE>
outstanding shares" of the Fund means, respectively, the vote of the lesser
of (i) 67% or more of the shares of the Fund present at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding shares of the
Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" in the
Statement of Additional Information). While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The two
highest ratings by S&P and Moody's are "AAA" and "AA" by S&P in the case of
long-term bonds and notes or "Aaa" and "Aa" by Moody's in the case of bonds;
"SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the case of notes;
"A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in the case of
tax-exempt commercial paper. The highest rating in the case of variable and
floating demand notes is "VMIG-1" by Moody's and "SP-1/AA" by S&P. Such
instruments may produce a lower yield than would be available from less highly
rated instruments. The Fund's Board of Directors has determined that obligations
which are backed by the credit of the Federal Government will be considered to
have a rating equivalent to Moody's "Aaa."
Subsequent to its purchase by the Fund, the quality of an investment may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. If this occurs, the Board of Directors of the Fund shall
reassess promptly whether the security presents minimal credit risks and shall
cause the Fund to take such action as the Board of Directors determines is in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the security is disposed of or matures within five business days of
the Manager becoming aware of the new rating and provided further that the Board
of Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (1) is in default, (2) ceases to
be an eligible investment under Rule 2a-7 or (3) is determined to no longer
present minimal credit risks, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. In the event that the security
is disposed of it shall be disposed of as soon as practicable consistent with
achieving an orderly disposition by sale, exercise of any demand feature or
otherwise.
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In the event of a default with respect to a security which immediately
before default accounted for 1/2 of 1% or more of the Fund's total assets, the
Fund shall promptly notify the Securities and Exchange Commission of such fact
and of the actions that the Fund intends to take in response to the situation.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
The Fund has adopted the following fundamental investment restrictions
which apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund is subject to further investment
restrictions that are set forth in the Statement of Additional Information. The
Fund may not:
1) Borrow Money. This restriction shall not apply to borrowings from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount up to 15% of the value of the Fund's total
assets (including the mount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing was made.
While borrowings exceed 5% of the value of the Fund's total assets,
the Fund will not make any investments. Interest paid on borrowings will
reduce net income.
2) Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
3) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
4) Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. With respect to 75% of the total amortized cost value of
the Fund's assets, not more than 5% of the Fund's assets may be invested in
securities that are subject to underlying puts from the same institution,
and no single bank shall issue its letter of credit and no single financial
institution shall issue a credit enhancement covering more than 5% of the
total assets of the Fund. However, if the puts are exercisable by the Fund
in the event of default on payment of principal and interest on the
underlying security, then the Fund may invest up to 10% of its assets in
securities underlying puts issued or guaranteed by the same institution;
additionally, a single bank can issue its letter of credit or a single
financial institution can issue a credit enhancement covering up to 10% of
the Fund's assets, where the puts offer the Fund such default protection.
5) Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of
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the Fund and then only up to 5% of the Fund's net assets, except as they may
be acquired as part of a merger, consolidation or acquisition of assets.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to investing its assets in
one or relatively few issuers. This non-diversification may present greater
risks than in the case of a diversified company. However, the Fund intends to
qualify as a "regulated investment company" under Subchapter M of the Code. The
Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
Government securities, investment company securities and other securities
limited in respect of any one issuer to not more than 5% in value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. In addition, at the close of each quarter of its taxable year,
not more than 25% in value of the Fund's total assets may be invested in
securities of one issuer other than Government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)
Because of the Fund's concentration in investments in North Carolina
Municipal Obligations, the safety of an investment in the Fund will depend
substantially upon the financial strength of North Carolina and its political
subdivisions. The North Carolina economy relies in part on activities that may
be subject to cyclical change, and the State is recovering from the recession.
The North Carolina Constitution provides that total expenditures for a
fiscal year shall not exceed the total of receipts and the surplus at the
beginning of the year. Effective January 1, 1995, the North Carolina General
Assembly repealed the Intangible Personal Property Tax. For The fiscal year
ending June 30, 1996, the General Assembly has appropriated $95.3 million from
individual income tax collections as reimbursements to the counties and cities
for revenue lost from the repeal of the Intangible Personal Property Tax.
For its fiscal year ended June 30, 1995, the State ended the year with a
fund balance of $892.2 million from $11,494.7 million of available funds. The
budget adopted for the fiscal year ending June 30, 1996 projects an ending fund
balance of $630.6 million.
The obligations of the State of North Carolina are currently rated in the
highest category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to
have a balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
There can be no assurance that general economic difficulties or the
financial circumstances of North Carolina or its counties and municipalities
will not adversely affect the market value of North Carolina Municipal
Obligations or the ability of the obligors to pay debt service on such
obligations.
The primary purpose of investing in a portfolio of North Carolina Municipal
Obligations is the special tax treatment accorded North Carolina resident
individual investors. However, payment of interest and preservation of principal
are dependent upon the continuing ability of the North Carolina issuers and/or
obligors of state, municipal and public authority debt obligations to meet their
obligations thereunder. Investors should consider the greater risk of the Fund's
concentration versus the safety that comes with a less concentrated investment
portfolio and should compare yields available on portfolios of North Carolina
issues with those of more diversified portfolios including out-of-state issues
before making an investment decision. The Fund's management believes that by
maintaining the Fund's investment portfolio in liquid, short-term, high quality
investments, including the
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participation certificates and other variable rate demand instruments that
have high quality credit support from banks, insurance companies or other
financial institutions, the Fund is largely insulated from the credit risks that
may exist on long-term North Carolina Municipal Obligations. For additional
information, please refer to the Statement of Additional Information.
MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall
management and supervision of the Fund, has employed Reich & Tang Asset
Management L.P. (the "Manager") to serve as investment manager of the Fund. The
Manager provides persons satisfactory to the Fund's Board of Directors to serve
as officers of the Fund. Such officers, as well as certain other employees and
directors of the Fund, may be directors or officers of Reich & Tang Asset
Management, Inc., the sole general partner of the Manager or employees of the
Manager or its affiliates. Due to the services performed by the Manager, the
Fund currently has no employees and its officers are not required to devote
full-time to the affairs of the Fund. The Statement of Additional Information
contains general background information regarding each director and principal
officer of the Fund.
The Manager is a Delaware limited partnership with its principal office at
600 Fifth Avenue, New York, New York 10020. The Manager was at November 30, 1995
manager, advisor or supervisor with respect to assets aggregating in excess of
$8.4 billion. The Manager acts as manager of fifteen other registered investment
companies and also advises pension trusts, profit-sharing trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the newly created limited partnership, Reich & Tang
Asset Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager.
New England Investment Companies, Inc. ("NEIC"), a Massachusetts
corporation, serves as the sole general partner of NEICLP. The New England
Mutual Life Insurance Company ("The New England") owns approximately 67.3% of
the total partnership units outstanding of NEICLP, and Reich & Tang, Inc. owns
approximately 22.6% of the outstanding partnership units of NEICLP. In addition,
NEIC is a wholly-owned subsidiary of The New England, which may be deemed a
"controlling person" of the Manager. NEIC is a holding company offering a broad
array of investment styles across a wide range of asset categories through ten
investment advisory/management affiliates and two distribution subsidiaries
which include, in addition to the Manager, Loomis, Sayles & Company, L.P.,
Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P., Marlborough Capital
Advisors, L.P., Westpeak Investment Advisors, L.P., Draycott Partners, Ltd., TNE
Investment Services, L.P., New England Investment Associates, Inc., Harris
Associates, and an affiliate, Capital Growth Management Limited Partnership.
These affiliates in the aggregate are investment advisers or managers to 42
other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. Pursuant to the Investment Management Contract, the Manager receives
from the Fund a fee equal to .40% per annum of the Fund's average daily net
assets for managing the Fund's investment portfolio and performing related
services. The Manager at its discretion may voluntarily waive all or a portion
of the Management Fee.
Pursuant to the Administrative Services Contract for the Fund, the Manager
performs clerical, accounting supervision and office service functions for the
Fund and provides the Fund with the personnel to (i) supervise the performance
of bookkeeping and related services by Investors
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Fiduciary Trust Company, the Fund's bookkeeping agent, (ii) prepare reports
to and filings with regulatory authorities and (iii) perform such other services
as the Fund may from time to time request of the Manager. The personnel
rendering such services may be employees of the Manager or its affiliates. The
Manager, at its discretion, may voluntarily waive all or a portion of the
administrative services fee. For its services under the Administrative Services
Contract, the Manager receives a fee equal to .21% per annum of the Fund's
average daily net assets. Any portion of the total fees received by the Manager
may be used to provide shareholder services and for distribution of Fund shares
(see "Distribution and Service Plan" herein.)
In addition, Reich & Tang Distributors L.P., the Distributor, receives a
servicing fee equal to .25% per annum of the average daily net assets of the
Class A shares of the Fund under the Shareholder Servicing Agreement. The fees
are accrued daily and paid monthly. Investment management fees and operating
expenses, which are attributable to both Classes of shares of the Fund, will be
allocated daily to each Class of shares based on the percentage of shares
outstanding for each Class at the end of the day.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on April 18, 1990. The authorized
capital stock of the Fund consists of twenty billion shares of stock having a
par value of one tenth of one cent ($.001) per share. The Fund currently has
only one portfolio. Except as noted below, each share when issued has equal
dividend, distribution and liquidation rights within the series for which it was
issued, and each fractional share has rights in proportion to the percentage it
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the affected series. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares when issued in accordance
with the terms offering will be fully paid and non-assessable. Shares of the
Fund are redeemable at net asset value, at the option of the shareholders. As of
November 30, 1995, the amount of shares owned by all officers and directors of
the Fund, as a group, was less than 1% of the outstanding shares of the Fund.
The Fund is subdivided into two classes of common stock, Class A and Class B.
Each share, regardless of class, will represent an interest in the same
portfolio of investments and will have identical voting, dividend, liquidation
and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee of .25% of the average daily net
assets of the Class A shares of the Fund pursuant to the Rule 12b-1 Distribution
and Service Plan of the Fund; (iii) only the holders of the Class A shares would
be entitled to vote on matters pertaining to the Plan and any related agreements
in accordance with provisions of Rule 12b-1; and (iv) the exchange privilege
will permit shareholders to exchange their shares only for shares of the same
class of a Fund that participates in a exchange privilege with the Fund. (See
"Exchange Privilege" herein.) Payments that are made under the Plans will be
calculated and charged daily to the appropriate class prior to determining daily
net asset value per share and dividends/distributions. Under its amended
Articles of Incorporation the Fund has the right to redeem, for cash, shares of
the Fund owned by any shareholder to the extent that, and at such times as, the
Fund's Board of Directors determines to be necessary or appropriate to prevent
any concentration of share ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
Generally, all shares will be voted in the aggregate, except if voting by
Class is required by
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<PAGE>
law or the matter involved affects only one Class, in which case shares will be
voted separately by class.
The shares of the Fund have non-cumulative voting rights, which means that
the holders of more than 50% of the shares outstanding voting for the election
of directors can elect 100% of the directors if the holders choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any person or persons to the Board of Directors. The Fund's By-laws
provide the holders of one-third of the outstanding shares of the Fund present
at a meeting in person or by proxy will constitute a quorum for the transaction
of business at all meetings.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income
(excluding capital gains and losses, if any, and amortization of market
discount) on each Fund Business Day and generally pays dividends monthly. There
is no fixed dividend rate. In computing these dividends, interest earned and
expenses are accrued daily.
Net realized capital gains, if any, are distributed at least annually and
in no event later than 60 days after the end of the Fund's fiscal year.
All dividends and distributions of capital gains are automatically invested
in additional Fund shares of the same Class immediately upon payment thereof
unless a shareholder has elected by written notice to the Fund to receive either
of such distributions in cash.
The Class A shares will bear the service fee under the Plan. As a result,
the net income of and the dividends payable to the Class A shares will be lower
than the net income of and dividends payable to the Class B shares of the Fund.
Dividends paid to each Class of shares of the Fund will, however, be declared
and paid on the same days at the same times and, except as noted with respect to
the service fees payable under the Plan, will be determined in the same manner
and paid in the same amounts.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. Certain Participating
Organizations are compensated by the Distributor from its shareholder servicing
fee and by the Manager from its management fee for the performance of these
services. An investor who purchases shares through a Participating Organization
that receives payment from the Manager or the Distributor will become a Class A
shareholder. (See "Investments Through Participating Organizations" herein.) All
other investors, and investors who have accounts with Participating
Organizations but who do not wish to invest in the Fund through their
Participating Organizations, may invest in the Fund directly as Class B
shareholders of the Fund and not receive the benefit of the servicing functions
performed by a Participating Organization. Class B shares may also be offered to
investors who purchase their shares through Participating Organizations who do
not receive compensation from the Distributor or the Manager because they may
not be legally permitted to receive such as fiduciaries. The Manager pays the
expenses incurred in the distribution of Class B shares. Participating
Organizations whose clients become Class B shareholders will not receive
compensation from the Manager or Distributor for the servicing they may provide
to their clients. (See "Direct Purchase and Redemption Procedures" herein.) With
respect to both Classes of shares, the minimum initial investment in the Fund by
Participating Organizations is $1,000, which may be satisfied by initial
investments aggregating $1,000 by a Participating Organization on behalf of
customers whose initial investments are less than $1,000. The minimum initial
investment for securities brokers, financial institutions and other industry
professionals that are not Participating Organizations is $1,000. The minimum
initial investment for all other investors is $5,000. Initial investments may be
made in any amount in
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<PAGE>
excess of the applicable minimums. The minimum amount for subsequent
investments is $100 unless the investor is a client of a Participating
Organization whose clients have made aggregate subsequent investments of $100.
The Fund sells and redeems its shares on a continuing basis at their net
asset value and does not impose a charge for either sales or redemptions. All
transactions in Fund shares are effected through the Fund's transfer agent,
which accepts orders for purchases and redemptions from Participating
Organizations and from investors directly.
In order to maximize earnings on its portfolio, the Fund normally has its
assets as fully invested as is practicable. Many securities in which the Fund
invests require immediate settlement in funds of Federal Reserve member banks on
deposit at a Federal Reserve Bank (commonly known as "Federal Funds").
Accordingly, the Fund does not accept a purchase order or invest an investor's
payment in portfolio securities until the payment has been converted into
Federal Funds.
Shares will be issued as of the first determination of the Fund's net asset
value per share for each Class made after acceptance of the investor's purchase
order at the net asset value next determined after receipt of the purchase
order. Shares begin accruing income dividends on the day they are purchased. The
Fund reserves the right to reject any purchase order for its shares.
Certificates for Fund shares will not be issued to an investor.
Shares are issued as of 12 noon, New York City time, on any Fund Business
Day on which an order for the shares and accompanying Federal Funds are received
by the Fund's transfer agent before 12 noon. Orders accompanied by Federal Funds
and received after 12 noon, New York City time, on a Fund Business Day will not
result in share issuance until the following Fund Business Day. Fund shares
begin accruing income on the day the shares are issued to an investor.
There is no redemption charge , no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals.
Proceeds of redemptions are paid by check. If a shareholder elects to redeem all
the shares of the Fund he owns, all dividends accrued to the date of such
redemption will be paid to the shareholder along with the proceeds of the
redemption. The right of redemption may not be suspended or the date of payment
upon redemption postponed for more than seven days after the shares are tendered
for redemption, except for any period during which the New York Stock Exchange,
Inc. is closed (other than customary weekend and holiday closings) or during
which the Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by the
Fund of its portfolio securities is not reasonably practicable or as a result of
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or for such other period as the Securities and Exchange
Commission may by order permit for the protection of the shareholders of the
Fund.
Redemption requests received by the Fund's transfer agent before 12 noon,
New York City time, on any Fund Business Day become effective at 12 noon that
day. Shares redeemed are not entitled to participate in dividends declared on
the day a redemption becomes effective. A redemption request received after 12
noon, New York City time, on any Fund Business Day becomes effective on the next
Fund Business Day.
The Fund has reserved the right to redeem the shares of any shareholder if
the net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $500.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed or the Fund may
impose a monthly service charge of $10 on
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<PAGE>
such accounts. For Participant Investor accounts, notice of a proposed
mandatory redemption will be given only to the appropriate Participating
Organization, and the Participating Organization will be responsible for
notifying the Participant Investor of the proposed mandatory redemption. During
the notice period a shareholder or Participating Organization who receives such
a notice may avoid mandatory redemption by purchasing sufficient additional
shares to increase his total net asset value to the minimum amount and thereby
avoid such mandatory redemption.
The redemption of shares may result in the investor's receipt of more or
less than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
INVESTMENTS THROUGH PARTICIPATING ORGANIZATIONS
Participant Investors may, if they wish, invest in the Fund through the
Participating Organizations with which they have accounts. "Participating
Organizations" are securities brokers, banks and financial institutions or other
industry professionals or organizations which have entered into shareholder
servicing agreements with the Distributor with respect to investment of their
customer accounts in the Fund. When instructed by its customer to purchase or
redeem Fund shares, the Participating Organization, on behalf of the customer,
transmits to the Fund's transfer agent a purchase or redemption order, and in
the case of a purchase order, payment for the shares being purchased.
Participating Organizations may confirm to their customers who are
shareholders in the Fund each purchase and redemption of Fund shares for the
customers' accounts. Also, Participating Organizations may send their customers
periodic account statements showing the total number of Fund shares owned by
each customer as of the statement closing date, purchases and redemptions of
Fund shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such statements will receive them from the Fund directly.
Participating Organizations may charge Participant Investors a fee in
connection with their use of specialized purchase and redemption procedures
offered to Participant Investors by the Participating Organizations. In
addition, Participating Organizations offering purchase and redemption
procedures similar to those offered to shareholders who invest in the Fund
directly may impose charges, limitations, minimums and restrictions in addition
to or different from those applicable to shareholders who invest in the Fund
directly. Accordingly, the net yield to investors who invest through
Participating Organizations may be less than by investing in the Fund directly.
A Participant Investor should read this Prospectus in conjunction with the
materials provided by the Participating Organization describing the procedures
under which Fund shares may be purchased and redeemed through the Participating
Organization.
The Glass-Steagall Act limits the ability of a depository institution to
become an underwriter or distributor of securities. However, it is the Fund
management's position that banks are not prohibited from acting in other
capacities for investment companies, such as providing administrative and
shareholder account maintenance services and receiving compensation from the
Manager for providing such services. However, this is an unsettled area of the
law and if a determination contrary to the Fund management's position is made by
a bank regulatory agency or court concerning shareholder servicing and
administration payments to banks from the Manager, any such payments will be
terminated and any shares registered in the banks' names, for their underlying
customers, will be reregistered in the name of the customers at no cost to the
Fund or its shareholders. In addition, state securities laws on this issue may
differ from the interpretations of
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<PAGE>
Federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
In the case of qualified Participating Organizations, orders received by
the Fund's transfer agent before 12 noon, New York City time, on a Fund Business
Day, without accompanying Federal Funds will result in the issuance of shares on
that day provided that the Federal Funds required in connection with the orders
are received by the Fund's transfer agent before 4:00 p.m., New York City time,
on that day. Orders for which Federal Funds are received after 4:00 p.m., New
York City time, will not result in share issuance until the following Fund
Business Day. Participating Organizations are responsible for instituting
procedures to insure that purchase orders by their respective clients are
processed expeditiously.
DIRECT PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures apply to investors who
wish to invest in the Fund directly and not through Participating Organizations.
These investors may obtain a current prospectus and the subscription order form
necessary to open an account by telephoning the Fund at the following numbers:
Within New York 212-830-5220
Outside New York (TOLL FREE) 800-221-3079
All shareholders, other than certain Participant Investors, will receive
from the Fund a monthly statement listing the total number of Fund shares owned
as of the statement closing date, purchase and redemptions of Fund shares during
the month covered by the statement and the dividends paid on Fund shares of each
shareholder during the statement period (including dividends paid in cash or
reinvested in additional Fund shares).
INITIAL PURCHASES OF SHARES
MAIL
Investors may send a check made payable to "North Carolina Daily Municipal
Income Fund, Inc." along with a completed subscription order form to:
North Carolina Daily Municipal
Income Fund, Inc.
600 Fifth Avenue
New York, New York 10020
Checks are accepted subject to collection at full value in United States
currency. Payment by a check drawn on any member of the Federal Reserve System
can normally be converted into Federal Funds within two business days after
receipt of the check. Checks drawn on a non-member bank may take substantially
longer to convert into Federal Funds. An investor's purchase order will not be
accepted until the Fund receives Federal Funds.
BANK WIRE
To purchase shares of the Fund using the wire system for transmittal of
money among banks, investors should first obtain a new account number by
telephoning the Fund at 212-830-5220 (within New York) or at 800-221-3079
(outside New York) and then instruct a member commercial bank to wire money
immediately to:
Investors Fiduciary Trust Company
ABA # 101003621
DDA # 890752-954-6
For North Carolina Daily Municipal
Income Fund, Inc.
Account of (Investor's Name)
Fund Account # 0827
SS#/Tax ID#
The investor should then promptly complete and mail the subscription order form.
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before 12 noon, New York City time on the
same day. There may be a charge by the investor's bank for transmitting the
money by bank wire, and there also may be a charge for use
15
<PAGE>
of Federal Funds. The Fund does not charge investors in the Fund for its
receipt of wire transfers. Payment in the form of a "bank wire" received prior
to 12 noon, New York City time, on a Fund Business Day will be treated as a
Federal Funds payment received on that day.
ELECTRONIC FUNDS TRANSFERS (EFT), PRE-AUTHORIZED CREDIT AND DIRECT
DEPOSIT PRIVILEGE
You may purchase shares of the Fund (minimum of $100) by having salary,
dividend payments, interest payments or any other payments designated by you, or
by having federal salary, social security, or certain veteran's, military or
other payments from the federal government, automatically deposited into your
Fund account. You can also have money debited from your checking account. To
enroll in any one of these programs, you must file with the Fund a completed EFT
Application, Pre-authorized Credit Application, or a Direct Deposit Sign-Up Form
for each type of payment that you desire to include in the Privilege. The
appropriate form may be obtained from your broker or the Fund. You may elect at
any time to terminate your participation by notifying in writing the appropriate
depositing entity and/or federal agency. Death or legal incapacity will
automatically terminate your participation in the Privilege. Further, the Fund
may terminate your participation upon 30 days' notice to you.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases can be made by bank wire, as indicated above, or by mailing
a check to:
North Carolina Daily Municipal
Income Fund, Inc.
Mutual Funds Group
P.O. Box 16815
Newark, New Jersey 07101-6815
There is a $100 minimum for subsequent purchases of shares. All payments should
clearly indicate the shareholder's account number.
Provided that the information on the subscription form on file with the
Fund is still applicable, a shareholder may reopen an account without filing a
new subscription order form at any time during the year the shareholder's
account is closed or during the following calendar year.
REDEMPTION OF SHARES
A redemption is effected immediately following, and at a price determined
in accordance with, the next determination of net asset value per share
following receipt by the Fund's transfer agent of the redemption order (and any
supporting documentation which it may require). Normally, payment for redeemed
shares is made on the same Fund Business Day after the redemption is effected,
provided the redemption request is received prior to 12 noon, New York City
time. However, redemption payments will not be effected unless the check
(including a certified or cashier's check) used for investment has been cleared
for payment by the investor's bank, which could take up to 15 days after
investment.
A shareholder's original subscription order form permits the shareholder to
redeem by written request and to elect one or more of the additional redemption
procedures described below. A shareholder may only change the instructions
indicated on his original subscription order form by transmitting a written
direction to the Fund's transfer agent. Requests to institute or change any of
the additional redemption procedures will require a signature guarantee.
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature and signed and guaranteed by
an eligible guarantor institution which includes a domestic bank, a domestic
savings and loan institution, a domestic credit union, a member bank of the
Federal Reserve system or a member firm of a national securities
16
<PAGE>
exchange, pursuant to the Fund's transfer agent's standards and procedures.
WRITTEN REQUESTS
Shareholders may make a redemption in any amount by sending a written
request to the Fund addressed to:
North Carolina Daily Municipal
Income Fund, Inc.
600 Fifth Avenue
New York, New York 10020
Normally the redemption proceeds are paid by check mailed to the shareholder of
record.
CHECKS
By making the appropriate election on their subscription form, shareholders may
request a supply of checks which may be used to effect redemptions. The checks,
which will be issued in the shareholder's name, are drawn on a special account
maintained by the Fund with the Fund's agent bank. Checks may be drawn in any
amount of $250 or more. When a check is presented to the Fund's agent bank, it
instructs the Fund's transfer agent to redeem a sufficient number of full and
fractional shares in the shareholder's account to cover the amount of the check.
The use of a check to make a withdrawal enables a shareholder in the Fund to
receive dividends on the shares to be redeemed up to the Fund Business Day on
which the check clears. Checks provided by the Fund may not be certified. Fund
shares purchased by check may not be redeemed by check until the check has
cleared, which can take up to 15 days following the date of purchase.
There is no charge to the shareholder for checks provided by the Fund. The
Fund reserves the right to impose a charge or impose a different minimum check
amount in the future, if the Board of Directors determines that doing so is in
the best interests of the Fund and its shareholders.
Shareholders electing the checking option are subject to the procedures,
rules and regulations of the Fund's agent bank governing checking accounts.
Checks drawn on a jointly owned account may, at the shareholder's election,
require only one signature. Checks in amounts exceeding the value of the
shareholder's account at the time the check is presented for payment will not be
honored. Since the dollar value of the account changes daily, the total value of
the account may not be determined in advance and the account may not be entirely
redeemed by check. In addition, the Fund reserves the right to charge the
shareholder's account a fee up to $20 for checks not honored as a result of an
insufficient account value, a check deemed not negotiable because it has been
held longer than six months, an unsigned check and a post-dated check. The Fund
reserves the right to terminate or modify the check redemption procedure at any
time or to impose additional fees following notification to the Fund's
shareholders.
Investors wishing to avail themselves of this method of redemption should
elect it on their subscription order form. Individuals and joint tenants are not
required to furnish any supporting documentation. Corporations and other
entities making this election, however, are required to furnish a certified
resolution or other evidence of authorization in accordance with the Fund's
normal practices. Appropriate authorization forms will be sent by the Fund or
its agents to corporations and other shareholders who select this option. As
soon as the authorization forms are filed in good order with the Fund's agent
bank, it will provide the shareholder with a supply of checks. This
checking service may be terminated or modified at any time.
TELEPHONE
The Fund accepts telephone requests for redemption from shareholders who
elect this option on their subscription order form. The proceeds of a telephone
redemption may be sent to the shareholders at their addresses or, if in excess
of $1,000, to their bank accounts, both as set forth in the subscription order
form or in a subsequent written authorization. The Fund may accept telephone
redemption instructions from any person with respect to accounts of shareholders
who elect this service and thus such
17
<PAGE>
shareholders risk possible loss of principal and interest in the event of a
telephone redemption not authorized by them. The Fund will employ reasonable
procedures to confirm that telephone redemption instructions are genuine, and
will require that shareholders electing such option provide a form of personal
identification. The failure by the Fund to employ such reasonable procedures may
cause the Fund to be liable for the losses incurred by investors due to
telephone redemptions based upon unauthorized or fraudulent instructions.
A shareholder making a telephone withdrawal should call the Fund at
212-830-5220; outside New York at 800-221-3079, and state: (i) the name of the
shareholder appearing on the Fund's records, (ii) the shareholder's account
number with the Fund, (iii) the amount to be withdrawn, (iv) whether such amount
is to be forwarded to the shareholder's designated bank account or address and
(v) the name of the person requesting the redemption. Usually the proceeds are
sent to the designated bank account or address on the same Fund Business Day the
redemption is effected, provided the redemption request is received before 12
noon, New York City time and on the next Fund Business Day if the redemption
request is received after 12 noon, New York City time. The Fund reserves the
right to terminate or modify the telephone redemption service in whole or in
part at any time and will notify shareholders accordingly.
EXCHANGE PRIVILEGE
Shareholders of the Fund are entitled to exchange some or all of a Class of
shares in the Fund for shares of the same Class of certain other investment
companies which retain Reich & Tang Asset Management L.P. as investment adviser
and which participate in the exchange privilege program with the fund. If only
one Class of shares is available in a particular exchange fund, the shareholder
of the Fund is entitled to exchange their shares for the shares available in
that exchange fund. Currently the exchange privilege program has been
established between the Fund and California Daily Tax Free Income Fund, Inc.,
Connecticut Daily Tax Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax
Free Income Fund, Inc., Florida Daily Municipal Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Government Securities Trust, Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. In the future, the exchange privilege program may
be extended to other investment companies which retain Reich & Tang Asset
Management L.P. as investment adviser or manager.
There is no charge for the exchange privilege or limitation as to frequency
of exchange. The minimum amount for an exchange is $1,000, except that
shareholders who are establishing a new account with an investment company
through the exchange privilege must ensure that a sufficient number of shares
are exchanged to meet the minimum initial investment required for the investment
company into which the exchange is being made. Each Class of shares is exchanged
at its respective net asset value.
The exchange privilege provides shareholders of the Fund with a convenient
method to shift their investment among different investment companies when they
feel such a shift is desirable. The exchange privilege is available to
shareholders resident in any state in which shares of the investment company
being acquired may legally be sold. Shares may be exchanged only between shares
of investment company accounts registered in identical names. Before making an
exchange, the investor should review the current prospectus of the investment
company into which the exchange is to be made.
An exchange pursuant to the exchange privilege is treated for Federal
income tax purposes as a sale on which a shareholder may realize a taxable gain
or loss.
18
<PAGE>
Instructions for exchanges may be made by sending a signature guaranteed
written request to:
North Carolina Daily Municipal
Income Fund, Inc.
600 Fifth Avenue
New York, New York 10020
or, for shareholders who have elected that option, by telephoning the Fund at
212-830-5220 (within New York) or 800-221-3079 (outside New York). The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
SPECIFIED AMOUNT AUTOMATIC WITHDRAWAL PLAN
Shareholders may elect to withdraw shares and receive payment from the Fund of a
specified amount of $50 or more automatically on a monthly or quarterly basis.
The monthly or quarterly withdrawal payments of the specified amount are made by
the Fund on the 23rd day of the month. Whenever such 23rd day of a month is not
a Fund Business Day, the payment date is the Fund Business Day preceding the
23rd day of the month. In order to make a payment, a number of shares equal in
aggregate net asset value to the payment amount are redeemed at their net asset
value on the Fund Business Day immediately preceding the date of payment. To the
extent that the redemptions to make plan payments exceed the number of shares
purchased through reinvestment of dividends and distributions, the redemptions
reduce the number of shares purchased on original investment, and may ultimately
liquidate a shareholder's investment.
The election to receive automatic withdrawal payments may be made at the
time of the original subscription by so indicating on the subscription order
form. The election may also be made, changed or terminated at any later time by
sending a signature guaranteed written request to the transfer agent. Because
the withdrawal plan involves the redemption of Fund shares, such withdrawals may
constitute taxable events to the shareholder but the Fund does not expect that
there will be any realized capital gains.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
and Reich & Tang Distributors L.P. (the "Distributor") have entered into a
Distribution Agreement and a Shareholder Servicing Agreement (with respect to
the Class A shares of the Fund only).
Reich & Tang Asset Management, Inc. serves as the sole general partner for
both Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and
Reich & Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Under the Distribution Agreement, the Distributor serves as distributor of
the Fund's shares and, for nominal consideration and as agent for the Fund, will
solicit orders for the purchase of the Fund's shares, provided that any orders
will not be binding on the Fund until accepted by the Fund as principal.
Under the Shareholder Servicing Agreement, the Distributor receives with
respect only to the Class A shares a service fee equal to .25% per annum of the
Class A shares' average daily net assets (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly and any portion of the fee
may be deemed to be used by the Distributor for payments to Participating
Organizations with respect to their provision of such services to their clients
or customers who are shareholders of the Class A shares of the Fund. The Class B
shareholders will not receive the benefit of such services from Participating
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Organizations and, therefore, will not be assessed a Shareholder Servicing Fee
The Plan and the Shareholder Servicing Agreement provide that, in addition
to the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Distributor and Participating Organizations in carrying out their
obligations under the Shareholder Servicing Agreement and (ii) preparing,
printing and delivering the Fund's prospectus to existing shareholders of the
Fund and preparing and printing subscription application forms for shareholder
accounts. The Plan provides that the Manager may make payments from time to time
from its own resources, which may include the management fee and past profits
for the following purposes: (i) to defray the costs of, and to compensate
others, including Participating Organizations with whom the Distributor has
entered into written agreements, for performing shareholder servicing on behalf
of the Class A shares of the Fund; (ii) to compensate certain Participating
Organizations for providing assistance in distributing the Class A shares of the
Fund; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Shareholding
Servicing Fee (with respect to Class A shares) and past profits, for the
purposes enumerated in (i) above. The Manager and Distributor may make payments
to Participating Organizations for providing certain of such services generally
up to a maximum of (on an annualized basis) .40% of the average daily net asset
value of the Class A shares serviced through the Participating Organizations.
The Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager and Distributor for any fiscal year under either
the Investment Management Contract in effect for that year or under the
Shareholder Servicing Agreement in effect for that year.
For the fiscal year ended August 31, 1995, the total amount spent pursuant
to the Plan for Class A shares was .43% of the average daily net assets of the
Fund, of which .19% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing and Administration Agreement
and an amount representing .24% of the average daily net assets was paid by the
Manager's predecessor (which may be deemed an indirect payment by the Fund). Of
the total amount paid by the Manager's predecessor, $27,650 was utilized for
compensation to sales personnel, $10,625 on Prospectus printing and $9,994 on
miscellaneous expenses.
The Glass-Steagall Act and other applicable laws and regulations prohibit
banks and other depository institutions from engaging in the business of
underwriting, selling or distributing most types of securities. However, in the
opinion of the Manager based on the advice of counsel, these laws and
regulations do not prohibit such depository institutions from providing other
services for investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein
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<PAGE>
and banks and financial institutions may be required to register as dealers
pursuant to state law.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code as a regulated investment
company that distributes "exempt-interest dividends" as defined in the Code. The
Fund's policy is to distribute as dividends each year 100% (and in no event less
than 90%) of its tax-exempt interest income, net of certain deductions, and its
investment company taxable income (if any). If distributions are made in this
manner, dividends derived from the interest earned on Municipal Obligations are
"exempt-interest dividends" and are not subject to regular Federal income tax,
although as described below, such "exempt-interest dividends" may be subject to
Federal alternative minimum tax. Dividends paid from taxable income, if any, and
distributions of any realized short-term capital gains (whether from tax-exempt
or taxable obligations) are taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Fund. The Fund does not expect to realize long-term
capital gains, and thus does not contemplate distributing "capital gain
dividends" or having undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including tax-exempt interest dividends paid by
the Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible in gross income. The Revenue
Reconciliation Act of 1993 (P.L. 103-66) and other recent tax legislation,
affects many of the Federal tax aspects of Municipal Obligations and makes many
important changes to the Federal income tax system, including an increase in
marginal tax rates. In addition to these changes, the Tax Reform Act of 1986
(P.L. 99-514) limited the annual amount of many types of tax-exempt bonds that a
state may issue and revised current arbitrage restrictions. P.L. 99-514 also
provided that interest on certain "private activity bonds" (generally, a bond
issue in which more than 10% of the proceeds are used for a non-governmental
trade or business and which meets the private security or payment test, or bond
issue which meets the private loan financing test) issued after August 7, 1986
will constitute an item of tax preference subject to the individual alternative
minimum tax and P.L. 103-66 increases the alternative minimum tax rate for
taxpayers other than corporations up to 28%. Further, corporations will be
required to include in alternative minimum taxable income 75% of the amount by
which its adjusted current earnings (including generally, tax-exempt interest)
exceeds its alternative minimum taxable income (determined without this tax
item). Certain tax-exempt interest is also included in the tax base for the
additional corporate minimum tax imposed by the Superfund Amendments and
Reauthorization Act of 1986. In addition, in certain cases Subchapter S
corporations with accumulated earnings and profits from Subchapter C years will
be subject to a tax on "passive investment income", including tax-exempt
interest. Although the Fund intends to maintain a $1.00 per share net asset
value, a shareholder may realize a taxable gain or loss upon the disposition of
shares.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner thereof and that the interest on the underlying Municipal Obligations
will be exempt from regular Federal income taxes to the Fund. Counsel has
pointed out that the Internal Revenue Service has
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<PAGE>
announced it will not ordinarily issue advance rulings on the question of
the ownership of securities or participation interests therein subject to a put
and could reach a conclusion different from that reached by counsel.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and the Court further held that there is no constitutional
prohibition against the Federal government's taxing the interest earned on state
or other municipal bonds. The Supreme Court decision affirms the authority of
the Federal government to regulate and control bonds such as the Municipal
Obligations and to tax such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the
Municipal Obligations in accordance with Section 103 of the Code.
NORTH CAROLINA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code, has filed with the North Carolina
Department of Revenue its election to be treated as a regulated investment
company and has complied with certain other requirements, exempt interest
dividends received from the Fund need not be included in North Carolina taxable
income by shareholders of the Fund subject to North Carolina taxation to the
extent such dividends represent interest from obligations issued by North
Carolina and political subdivisions of North Carolina. Dividends with respect to
interest on obligations from states other than North Carolina and its political
subdivisions are required to be added to Federal taxable income in calculating
North Carolina taxable income. The portion of distributions from the Fund that
represents capital gain is reportable for North Carolina income tax purposes as
capital gain income and not dividend income. Exempt-interest dividends correctly
identified by the Fund as derived from obligations of Puerto Rico and the Virgin
Islands, as well as other types of obligations that North Carolina is prohibited
from taxing under the Constitution or the laws of the United States of America
or the constitution or laws of North Carolina ("Territorial Municipal
Obligations") should be exempt from the North Carolina Income Taxation provided
the Fund complies with the North Carolina law.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from the Fund and ownership of shares of the Fund in
their own states and localities.
GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on April
18, 1990 and it is registered with the Securities and Exchange Commission as a
non-diversified, open-end, management investment company.
The Fund prepares semi-annual unaudited and annual audited reports which
include a list of investment securities held by the Fund and which are sent to
shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of the Fund's distribution agreement with respect to a
particular class or series of stock, and (d) upon the written request of holders
or shares entitled to cast not less than 25% of all the votes entitled to be
cast at such meeting. Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940 Act
including the removal of Fund director(s) and communication among
22
<PAGE>
shareholders, any registration of the Fund with the Securities and Exchange
Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
For further information with respect to the Fund and the shares offered
hereby, reference is made to the Fund's registration statement filed with the
Securities and Exchange Commission, including the exhibits thereto. The
registration statement and the exhibits thereto may be examined at the
Commission and copies thereof may be obtained upon payment of certain
duplicating fees.
NET ASSET VALUE
The net asset value of each Class of the Fund's shares is determined as of
12 noon, New York City time, on each Fund Business Day. Fund Business Day means
weekdays (Monday through Friday) except customary business holidays and Good
Friday. The net asset value of a Class is computed by dividing the value of the
Fund's net assets for such Class (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued but excluding
capital stock and surplus) by the total number of shares outstanding for such
Class.
The Fund's portfolio securities are valued at their amortized cost in
compliance with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost
valuation involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, except that if
fluctuating interest rates cause the market value of the Fund's portfolio to
deviate more than 1/2 of 1% from the value determined on the basis of amortized
cost, the Board of Directors will consider whether any action should be
initiated. Although the amortized cost method provides certainty in valuation,
it may result in periods during which the value of an instrument is higher or
lower than the price an investment company would receive if the instrument were
sold. The Fund intends to maintain a stable net asset value at $1.00 per share
although there can be no assurance that this will be achieved.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105 is custodian for the Fund's cash and securities, and is the
transfer agent and dividend agent for the shares of the Fund. The Fund's
custodian and transfer agent does not assist in, and is not responsible for,
investment decisions involving assets of the Fund.
23
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TABLE OF CONTENTS
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Table of Fees and Expenses.......................2
Selected Financial Information...................3 NORTH
Introduction.....................................4 CAROLINA
Investment Objectives, DAILY
Policies and Risks.............................5 MUNICIPAL
Management of the Fund...........................10 INCOME
Description of Common Stock......................11 FUND, INC.
How to Purchase and Redeem Shares................12
Dividends and Distributions......................14 PROSPECTUS
Investments Through January 2 , 1996
Participating Organizations.....................14
Direct Purchase and
Redemption Procedures ........................15
Initial Purchases of Shares.....................15
Electronic Fund Transfer (EFT), Preauthorized
Credit and Direct Deposit Privelege............16
Subsequent Purchases of Shares..................16
Redemption of Shares............................16
Exchange Privilege..............................18
Specified Amount Automatic
Withdrawal Plan................................19
Distribution and Service Plan....................19
Federal Income Taxes.............................21
North Carolina Income Taxes......................22
General Information .............................22
Net Asset Value..................................23
Custodian and Transfer Agent.....................23
<PAGE>
RULE 497(b)
Registration No. 33-25747
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NORTH CAROLINA
DAILY MUNICIPAL 600 Fifth Avenue, New York, NY 10020
INCOME FUND, INC. (212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
January 2, 1996
This Statement of Additional Information, although not in itself a Prospectus,
expands upon and supplements the information contained in the current Prospectus
of North Carolina Daily Municipal Income Fund, Inc. (the "Fund"), dated January
2, 1996 and should be read in conjunction with the Prospectus. The Fund's
Prospectus may be obtained from any Participating Organization or by writing or
calling the Fund. This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety.
<TABLE>
<CAPTION>
Table of Contents
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<S> <C> <C>
Investment Objectives,................................ Yield Quotations..........................................12
Policies and Risks................................2 Manager...................................................13
Description of Municipal Obligations..................3 Expense Limitation...................................14
Variable Rate Demand Instruments.................. Management of the Fund....................................15
and Participation Certificates. .............5 Compensation Table...................................17
When-Issued Securities............................7 Counsel and Auditors.................................17
Stand-by Commitments..............................7 Distribution and Service Plan.............................17
Taxable Securities....................................8 Description of Common Stock ..............................18
Repurchase Agreements.............................9 Federal Income Taxes......................................20
North Carolina Risk Factors...........................9 North Carolina Income Taxes...............................21
Investment Restrictions...............................10 Custodian and Transfer Agent..............................22
Portfolio Transactions................................11 Description of Ratings....................................23
How to Purchase....................................... Taxable Equivalent Yield Tables...........................24
and Redeem Shares.................................11 Independent Auditor's Report..............................26
Net Asset Value.......................................11 Financial Statements......................................27
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
As stated in the Prospectus, the Fund is a non-diversified, open-end, management
investment company that is a short-term, tax-exempt money market fund. The
Fund's investment objectives are to seek as high a level of current income,
exempt from regular Federal tax and, to the extent possible, North Carolina
income taxes (the "North Carolina Income Tax"), as is believed to be consistent
with preservation of capital, maintenance of liquidity and stability of
principal. No assurance can be given that these objectives will be achieved. The
following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus. The Fund's assets will be invested
primarily in high quality debt obligations issued by or on behalf of the State
of North Carolina, other states, territories and possessions of the United
States and their authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer at the date of issuance, currently exempt from regular Federal income
taxation ("Municipal Obligations") and in participation certificates (which, in
the opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be
treated as the owner of the underlying Municipal Obligations for Federal income
tax purposes) in Municipal Obligations purchased from banks, insurance companies
or other financial institutions. Dividends paid by the Fund which are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and participation certificates in
Municipal Obligations will be exempt from Federal income tax provided the Fund
complies with Section 852(b)(5) of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, "exempt-interest
dividends" may be subject to the Federal alternative minimum tax.
Securities, the interest income on which may be subject to the Federal
alternative minimum tax (including participation certificates in such
securities), may be purchased by the Fund without limit. Securities, the
interest income on which is subject to regular Federal, state and local income
tax, will not exceed 20% of the value of the Fund's total assets. (See "Federal
Income Taxes" herein.) Further, interest on Municipal Obligations is includable
in a 0.12% additional corporate minimum tax imposed by the Superfund Amendments
and Reauthorization Act of 1986. Exempt-interest dividends paid by the Fund that
are correctly identified by the Fund as derived from obligations issued by or on
behalf of the State of North Carolina or any North Carolina local governments,
or their instrumentalities, authorities or districts ("North Carolina Municipal
Obligations") will be exempt from the North Carolina Income Tax. Exempt-interest
dividends correctly identified by the Fund as derived from obligations of Puerto
Rico and the Virgin Islands, as well as any other types of obligations that
North Carolina is prohibited from taxing under the Constitution, the laws of the
United States of America or the North Carolina Constitution ("Territorial
Municipal Obligations"), also should be exempt from North Carolina Income Tax
provided the Fund complies with North Carolina laws. (See "North Carolina Income
Taxes" herein.) To the extent that suitable North Carolina Municipal Obligations
are not available for investment by the Fund, the Fund may purchase Municipal
Obligations issued by other states, their agencies and instrumentalities, the
dividends on which will be designated by the Fund as derived from interest
income which will be, in the opinion of bond counsel to the issuer at the date
of issuance, exempt from regular Federal income tax but will be subject to the
North Carolina Income Tax. Except as a temporary defensive measure during
periods of adverse market conditions as determined by the Manager, the Fund will
invest at least 65% of its assets in North Carolina Municipal Obligations,
although the exact amount of the Fund's assets invested in such securities will
vary from time to time. The Fund seeks to maintain an investment portfolio with
a dollar-weighted average maturity of 90 days or less and to value its
investment portfolio at amortized cost and maintain a net asset value at a $1.00
per share of each Class. There can be no assurance that this value will be
maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in participation
certificates in Municipal Obligations, the Fund reserves the right to invest up
to 20% of the value of its total assets in securities, the interest income on
which is subject to regular Federal, state and local income tax. The Fund will
invest more than 25% of its assets in participation certificates purchased from
banks in industrial revenue bonds and other North Carolina Municipal
Obligations. In view of this "concentration" in bank participation certificates
in North Carolina Municipal Obligations, an investment in Fund shares should be
made with an understanding of the characteristics of the banking industry and
the risks which such an investment may entail. (See "Variable Rate Demand
Instruments and Participation Certificates" herein.) The
2
<PAGE>
investment objectives of the Fund described in the preceding paragraphs of
this section may not be changed unless approved by the holders of a majority of
the outstanding shares of the Fund that would be affected by such a change. As
used herein, the term "majority of the outstanding shares" of the Fund means,
respectively, the vote of the lesser of (i) 67% or more of the shares of the
Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of the Fund.
The Fund may only purchase United States dollar-denominated Municipal
Obligations that have been determined by the Fund's Board of Directors to
present minimal credit risks and that are Eligible Securities at the time of
acquisition. The term Eligible Securities means (i) Municipal Obligations with
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") (acquisition in
the latter situation must also be ratified by the Board of Directors); (ii)
Municipal Obligations with remaining maturities of 397 days or less but that at
the time of issuance were long-term securities (i.e., with maturities greater
than 366 days) and whose issuer has received from the Requisite NRSROs a rating
with respect to comparable short-term debt in the two highest short-term rating
categories and (iii) unrated Municipal Obligations determined by the Fund's
Board of Directors to be of comparable quality. Where the issuer of a long-term
security with a remaining maturity which would otherwise qualify it as an
Eligible Security, does not have rated short-term debt outstanding, the
long-term security is treated as unrated but may not be purchased if it has a
long-term rating from any NRSRO that is below the two highest long-term
categories. A determination of comparability by the Board of Directors is made
on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the Municipal Obligations or participation certificates.
(See "Variable Rate Demand Instruments and Participation Certificates" herein).
While there are several organizations that currently qualify as NRSROs, two
examples of NRSROs are Standard & Poor's Corporation ("S&P") and Moody's
Investors Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's
are "AAA" and "AA" by S&P in the case of long-term bonds and notes or "Aaa" and
"Aa" by Moody's in the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and
"MIG-2" by Moody's in the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and
"Prime-2" by Moody's in the case of tax-exempt commercial paper. The highest
rating in the case of variable and floating demand notes is "VMIG-1" by Moody's
or "SP-1/AA" by S&P. Such instruments may produce a lower yield than would be
available from less highly rated instruments. The Fund's Board of Directors has
determined that Municipal Obligations which are backed by the credit of the
Federal Government will be considered to have a rating equivalent to Moody's
"Aaa". (See "Description of Ratings" herein.)
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the Investment Company Act of 1940 (the "1940 Act")
with respect to investing its assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. However, the Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Code. The Fund will be restricted in that at
the close of each quarter of the taxable year, at least 50% of the value of its
total assets must be represented by cash, government securities, investment
company securities and other securities limited in respect of any one issuer to
not more than 5% in value of the total assets of the Fund and to not more than
10% of the outstanding voting securities of such issuer. In addition, at the
close of each quarter of its taxable year, not more than 25% in value of the
Fund's total assets may be invested in securities of one issuer other than
Government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates".
3
<PAGE>
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issue of one year or more and which
are issued to raise funds for various public purposes such as construction
of a wide range of public facilities, to refund outstanding obligations and
to obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds include states,
counties, cities, towns and other governmental units. The principal of, and
interest on revenue bonds are payable from the income of specific projects
or authorities and generally are not supported by the issuer's general power
to levy taxes. In some cases, revenues derived from specific taxes are
pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities financed
by the bonds or other guarantor to meet its financial obligations and, in
certain instances, the pledge of real and personal property as security for
payment. If there is no established secondary market for the IRBs, the IRBs
or the participation certificates in IRBs purchased by the Fund will be
supported by letters of credit, guarantees or insurance that meet the
definition of Eligible Securities at the time of acquisition and provide the
demand feature which may be exercised by the Fund at any time to provide
liquidity. Shareholders should note that the Fund may invest in IRBs
acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes are
issued by local agencies and are guaranteed by the United States Department
of Housing and Urban Development. Project notes are also secured by the full
faith and credit of the United States. The Fund's investments may be
concentrated in Municipal Notes of North Carolina issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the event
of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has
no obligation to make future payments under the lease or contract unless
money is appropriated for such purpose by the
4
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appropriate legislative body on a yearly or other periodic basis. To reduce
this risk, the Fund will only purchase Municipal Leases subject to a
non-appropriation clause where the payment of principal and accrued
interest is backed by an unconditional irrevocable letter of credit, a
guarantee, insurance or other comparable undertaking of an approved
financial institution. These types of Municipal Leases may be considered
illiquid and subject to the 10% limitation of investments in illiquid
securities set forth under "Investment Restrictions" contained herein. The
Board of Directors may adopt guidelines and delegate to the Manager the
daily function of determining and monitoring the liquidity of Municipal
Leases. In making such determination, the Board and the Manager may
consider such factors as the frequency of trades for the obligation, the
number of dealers willing to purchase or sell the obligations and the
number of other potential buyers and the nature of the marketplace for the
obligations, including the time needed to dispose of the obligations and
the method of soliciting offers. If the Board determines that any Municipal
Leases are illiquid, such lease will be subject to the 10% limitation on
investments in illiquid securities.
5. Any other Federal tax-exempt, and to the extent possible, North Carolina
Income tax-exempt obligations issued by or on behalf of states and municipal
governments and their authorities, agencies, instrumentalities and political
subdivisions, whose inclusion in the Fund would be consistent with the
Fund's "Investment Objectives, Policies and Risks" and permissible under
Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall reassess
promptly whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines in
the best interest of the Fund and its shareholders. However, reassessment is not
required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (1) is in default, (2)
ceases to be an Eligible Security or (3) there is a determination that it no
longer presents minimal credit risks, the Fund will dispose of the Municipal
Obligation absent a determination by the Fund's Board of Directors that disposal
of the Municipal Obligation would not be in the best interests of the Fund. In
the event that the Municipal Obligation is disposed of it shall be disposed of
as soon as practicable consistent with achieving an orderly disposition by sale,
exercise of any demand feature or otherwise. In the event of a default with
respect to a Municipal Obligation which immediately before default accounted for
1/2 of 1% or more of the Fund's total assets, the Fund shall promptly notify the
Securities and Exchange Commission of such fact and of the actions that the Fund
intends to take in response to the situation. Certain obligations issued by
instrumentalities of the United States Government are not backed by the full
faith and credit of the United States Treasury but only by the creditworthiness
of the instrumentality. The Fund's Board of Directors has determined that any
obligation that depends directly, or indirectly through a government insurance
program or other guarantee, on the full faith and credit of the United States
Government will be considered to have a rating in the highest category. Where
necessary to ensure that the Municipal Obligations are Eligible Securities or
where the obligations are not freely transferable, the Fund will require that
the obligation to pay the principal and accrued interest be backed by an
unconditional irrevocable bank letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution that would qualify
the investment as an Eligible Security.
VARIABLE RATE DEMAND INSTRUMENTS AND PARTICIPATION CERTIFICATES
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days and the adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund will decide
which variable rate demand
- --------------------------------------------------------------------------------
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular bank
may differ from other banks and will be the rate announced by each bank on a
particular day. Changes in the prime rate may occur with great frequency and
generally become effective on the date announced.
5
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instruments it will purchase in accordance with procedures prescribed by
its Board of Directors to minimize credit risks. A fund utilizing the amortized
cost method of valuation under Rule 2a-7 of the 1940 Act may purchase variable
rate demand instruments only if (i) the instrument is subject to an
unconditional demand feature, exercisable by the Fund in the event of a default
in the payment of principal or interest on the underlying securities, that is an
Eligible Security or (ii) the instrument is not subject to an unconditional
demand feature but does qualify as an Eligible Security and has a long-term
rating by the Requisite NRSROs in one of the two highest rating categories, or
if unrated, is determined to be of comparable quality by the Fund's Board of
Directors. The Fund's Board of Directors may determine that an unrated variable
rate demand instrument meets the Fund's high quality criteria if it is backed by
a letter of credit or guarantee or is insured by an insurer that meets the
quality criteria for the Fund stated herein or on the basis of a credit
evaluation of the underlying obligor. If an instrument is ever not deemed to be
an Eligible Security, the Fund either will sell it in the market or exercise the
demand feature.
The variable rate demand instruments that the Fund may invest in include
participation certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase participation certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A participation certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and, where applicable, draw on the letter of
credit or insurance after no more than 30 days notice either at any time or at
specified intervals not exceeding 397 days (depending on the terms of the
participation), for all or any part of the full principal amount of the Fund's
participation interest in the security plus accrued interest. The Fund intends
to exercise the demand only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares or (3) to maintain a high quality investment
portfolio. The institutions issuing the participation certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the participation certificate bear
the cost of the insurance, although the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation (see "Expense Limitation" herein).
The Manager has been instructed by the Fund's Board of Directors to continually
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by the Fund, including the participation certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Fund may subscribe. Although these
instruments may be sold by the Fund, the Fund intends to hold them until
maturity, except under the circumstances stated above (see "Federal Income
Taxes" herein).
In view of the "concentration" of the Fund in bank participation
certificates in North Carolina Municipal Obligations, which may be secured by
bank letters of credit or guarantees, an investment in the Fund should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans and
other financial commitments which may be made and interest rates and fees which
may be charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities including, for example, securities the interest upon
which is paid from revenues of similar type projects, or securities the issuers
of which are located in the same state.
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<PAGE>
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
limit the degree to which interest on such variable rate demand instruments may
fluctuate; to the extent it does, increases or decreases in value may be
somewhat greater than would be the case without such limits. Additionally, the
portfolio may contain variable rate demand participation certificates in fixed
rate Municipal Obligations. The fixed rate of interest on these Municipal
Obligations will be a ceiling on the variable rate of the participation
certificate. In the event that interest rates increased so that the variable
rate exceeded the fixed rate on the Municipal Obligations, the Municipal
Obligations could no longer be valued at par and may cause the Fund to take
corrective action, including the elimination of the instruments from the
portfolio. Because the adjustment of interest rates on the variable rate demand
instruments is made in relation to movements of the applicable banks' "prime
rates", or other interest rate adjustment index, the variable rate demand
instruments are not comparable to long-term fixed rate securities. Accordingly,
interest rates on the variable rate demand instruments may be higher or lower
than current market rates for fixed rate obligations of comparable quality with
similar maturities.
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (1) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment. The maturity of a variable rate demand instrument will be determined
in the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. If a variable rate demand instrument ceases to be an
Eligible Security it will be sold in the market or through exercise of the
repurchase demand feature to the issuer.
WHEN-ISSUED SECURITIES
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way, that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
STAND-BY COMMITMENTS
When the Fund purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price
7
<PAGE>
with same day settlement. A stand-by commitment is the equivalent of a
"put" option acquired by the Fund with respect to a particular Municipal
Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (2) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects that stand-by commitments generally will be available without
the payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio would not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after each stand-by
commitment was acquired.
The Fund would enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not meet the
eligibility criteria, only where the issuer of the stand-by commitment has
received a rating which meets the eligibility criteria or, if not rated,
presents a minimal risk of default as determined by the Board of Directors. The
Fund's reliance upon the credit of these banks and broker-dealers would be
supported by the value of the underlying Municipal Obligations held by the Fund
that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income taxes
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund would be valued at zero in determining net asset value. In those cases in
which the Fund paid directly or indirectly for a stand-by commitment, its cost
would be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments would not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments that the Fund may enter into are subject to certain
risks, which include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
TAXABLE SECURITIES
Although the Fund will attempt to invest 100% of its net assets in
tax-exempt Municipal Obligations, the Fund may invest up to 20% of the value of
its total assets in securities of the kind described below, the interest income
on which is subject to regular Federal income tax, under any one or more of the
following circumstances: (a) pending investment of proceeds of sales of Fund
shares or of portfolio securities, (b) pending settlement of purchases of
portfolio securities and (c) to maintain liquidity for the purpose of meeting
anticipated redemptions. In addition, the Fund may temporarily invest more than
20% in such taxable securities when, in the opinion of the Manager, it is
advisable to do so because of adverse market conditions
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<PAGE>
affecting the market for Municipal Obligations. The kinds of taxable
securities in which the Fund may invest are limited to the following short-term,
fixed-income securities (maturing in 397 days or less from the time of
purchase): (1) obligations of the United States Government or its agencies,
instrumentalities or authorities; (2) commercial paper meeting the definition of
Eligible Securities at the time of acquisition; (3) certificates of deposit of
domestic banks with assets of $1 billion or more; and (4) repurchase agreements
with respect to any Municipal Obligations or other securities which the Fund is
permitted to own. (See "Federal Income Taxes" herein.)
REPURCHASE AGREEMENTS
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon, and the
Fund or its custodian shall have possession of the collateral, which the Fund's
Board believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
in connection with the disposition of the collateral. The Fund's Board believes
that the collateral underlying repurchase agreements may be more susceptible to
claims of the seller's creditors than would be the case with securities owned by
the Fund. It is expected that repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by the Fund. The
Fund will not invest in a repurchase agreement maturing in more than seven days
if any such investment together with illiquid securities held by the Fund exceed
10% of the Fund's total net assets. (See Investment Restriction Number 6
herein.) Repurchase agreements are subject to the same risks described herein
for stand-by commitments.
NORTH CAROLINA RISK FACTORS
Because of the Fund's concentration in investments in North Carolina Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of North Carolina and its political subdivisions.
The North Carolina economy relies in part on activities that may be subject to
cyclical change.
The North Carolina Constitution provides that total expenditures for a
fiscal year shall not exceed the total of receipts and the surplus at the
beginning of the year. Effective January 1, 1995, the North Carolina General
Assembly repealed the Intangible Personal Property Tax. For the fiscal year
ending June 30, 1996, the General Assembly has appropriated $95.3 million from
individual income tax collections as reimbursements to the counties and cities
for the revenue lost from the repeal of Intangible Personal Property Tax.
For its fiscal year ended June 30, 1995, the State ended the year with a fund
balance of $892.2 million from $11,494.7 million of available funds. The budget
adopted for the fiscal year ending June 30, 1996 projects an ending fund balance
of $630.6 million.
The obligations of the State of North Carolina are currently rated in the
highest category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to have a
balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
There can be no assurance that general economic difficulties or the financial
circumstances of North Carolina or its counties and municipalities will not
adversely affect the market value of North Carolina Municipal Obligations or the
ability of the obligors to pay debt service on such obligations.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios and which may not be changed unless approved by a
majority of the outstanding shares of each series of the Fund's shares that
would be affected by such a change. The Fund may not:
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<PAGE>
1. Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" or any other form of Federal tax-exempt
investment which meets the Fund's high quality criteria, as determined by
the Board of Directors and which is consistent with the Fund's objectives
and policies.
2. Borrow Money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on
borrowings will reduce net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" herein.
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Fund from investing in Municipal Obligations secured
by real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Objectives, Policies and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that the Fund may invest more than 25% of its
assets in bank participation certificates and there shall be no limitation
on the purchase of those Municipal Obligations and other obligations issued
or guaranteed by the United States Government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-government user, then such non-government user would be deemed to be
the sole issuer. If, however, in either case, the creating government or
some other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be
treated as an issue of such government, other entity or bank. With respect
to 75% of the total amortized cost value of the Fund's assets, not more
than 5% of the Fund's assets may be invested in securities that are subject
to underlying puts from the same institution, and no single bank shall
issue its letter of credit and no single financial institution shall issue
a credit enhancement covering more than 5% of the total assets of the Fund.
However, if the puts are exercisable by the Fund in the event of default on
payment of principal and interest on the underlying security, then the Fund
may invest up to 10% of its assets in securities underlying puts issued or
guaranteed by the same institution; additionally, a single bank can issue
its letter of credit or a single financial institution can issue a credit
enhancement covering up to 10% of the Fund's assets, where the puts offer
the Fund such default protection.
11. Invest in securities of other investment companies, except the Fund may
purchase unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
10
<PAGE>
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PORTFOLIO TRANSACTIONS
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the participation certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares of each Class in
the Prospectus is herein incorporated by reference.
NET ASSET VALUE
The Fund does not determine net asset value per share of each Class on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, except that if fluctuating
interest rates cause the market value of the Fund's portfolio to deviate more
than 1/2 of 1% from the value determined on the basis of amortized cost, the
Board of Directors will consider whether any action should be initiated, as
described in the following paragraph. Although the amortized cost method
provides certainty in
11
<PAGE>
valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Investment Objectives,
Policies and Risks" herein.)
YIELD QUOTATIONS
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the Securities and Exchange Commission. Under that
method, the Fund's yield figure, which is based on a chosen seven-day period, is
computed as follows: the Fund's return for the seven-day period (which is
obtained by dividing the net change in the value of a hypothetical account
having a balance of one share at the beginning of the period by the value of
such account at the beginning of the period (expected to always be $1.00) is
multiplied by (365/7) with the resulting annualized figure carried to the
nearest hundredth of one percent). For purposes of the foregoing computation,
the determination of the net change in account value during the seven-day period
reflects (i) dividends declared on the original share and on any additional
shares, including the value of any additional shares purchased with dividends
paid on the original share and (ii) fees charged to all shareholder accounts.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Fund's portfolio securities are not included in the computation. Therefore
annualized yields may be different from effective yields quoted for the same
period.
The Fund's "effective yield" is obtained by adjusting its "current yield" to
give effect to the compounding nature of the Fund's portfolio, as follows: The
unannualized base period return is compounded and brought out to the nearest one
hundredth of one percent by adding one to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting one from the result,
i.e., effective yield = (base period return + 1)365/7 - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent yield. The tax
equivalent yield is computed based upon a 30-day (or one month) period ended on
the date of the most recent balance sheet included in this Statement of
Additional Information, computed by dividing that portion of the yield of the
Fund (as computed pursuant to the formulae previously discussed) which is tax
exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax exempt. The tax
equivalent yield for the Fund may also fluctuate daily and does not provide a
basis for determining future yields.
The Fund may from time to time advertise a taxable equivalent yield table which
shows the yield that an investor would need to receive from a taxable investment
in order to equal a tax-free yield from the Fund. See "Taxable Equivalent Yield
Table" herein.
The Fund's Class A shares' yield for the seven day period ended November
30, 1994 was 3.11% which is equivalent to an effective yield of 3.16%.
12
<PAGE>
MANAGER
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020 (the "Manager"). The Manager was at November 30, 1995
manager, advisor or supervisor with respect to assets aggregating in excess of
$8.4 billion. In addition to the Fund, the Manager's advisory clients include,
among others, California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich
& Tang Government Securities Trust, Short Term Income Fund, Inc. and Tax Exempt
Proceeds Fund, Inc. The Manager also advises pension trusts, profit-sharing
trusts and endowments.
New England Investment Companies, L.P. ("NEICLP") is the limited partner and
owner of a 99.5% interest in the newly created limited partnership, Reich & Tang
Asset Management L.P., the Manager. Reich & Tang Asset Management, Inc. (a
wholly-owned subsidiary of NEICLP) is the general partner and owner of the
remaining .5% interest of the Manager. New England Investment Companies, Inc.
("NEIC"), a Massachusetts corporation, serves as the sole general partner of
NEICLP. The New England Mutual Life Insurance Company ("The New England") owns
approximately 67.3% of the total partnership units outstanding of NEICLP and
Reich & Tang, Inc. owns approximately 22.6% of the outstanding partnership units
of NEICLP. NEIC is a wholly-owned subsidiary of The New England, which may be
deemed a "controlling person" of the Manager. NEIC is a holding company offering
a broad array of investment styles across a wide range of asset categories
through ten investment advisory/ management affiliates and two distribution
subsidiaries which include, in addition to the Manager, Loomis, Sayles &
Company, L.P., Copley Real Estate Advisors, Inc., Back Bay Advisors, L.P.,
Marlborough Capital Advisors, L.P., Westpeak Investment Advisors, L.P., Draycott
Partners, Ltd., TNE Investment Services L.P., New England Investment Associates,
Inc.,Harris Associates, and an affiliate, Capital Growth Management Limited
Partnership. These affiliates in the aggregate are investment advisors or
managers of 42 other registered investment companies.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund. The Manager provides persons satisfactory to the Board of Directors of
the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors or officers of NEIC,
the sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management contract was approved by the shareholders,
effective September 15, 1993. The Investment Management Contract was approved by
the Board of Directors, including a majority of directors who are not interested
persons of the Fund (as defined in the 1940 Act), or the Manager, effective
October 1, 1994. The Investment Management Contract has a term which extends to
August 31, 1996, and may be continued in force thereafter for successive
twelve-month periods beginning each September 1, provided that such continuance
is specifically approved annually by majority vote of the Fund's outstanding
voting securities or by its Board of Directors, and in either case by a majority
of the directors who are not parties to the Investment Management Contract or
interested persons by any such party, by votes cast in person at a meeting
called for the purpose of voting on such matter.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .40% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager at its discretion may voluntarily
waive all or a portion of the management fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust
13
<PAGE>
Company, the Fund's bookkeeping or recordkeeping agent, (ii) prepare
reports to and filings with regulatory authorities and (iii) perform such other
services as the Fund may from time to time request of the Manager. The personnel
rendering such services may be employees of the Manager, of its affiliates or of
other organizations. For its services under the Administrative Services
Contract, the Manager receives from the Fund a fee equal to .21% per annum of
the Fund's average daily net assets.
For the Fund's fiscal year ended August 31, 1993 the fee payable to the
investment adviser under the Investment Management Contract was $542,791,
$86,794 of which was voluntarily waived. The Fund's net assets at the close of
business on August 31, 1993 totaled $93,293,979. For the Fund's fiscal year
ended August 31, 1994 the fee payable to the Manager's predecessor under the
Investment Management Contract was $436,045, of which $3,541 was voluntarily
waived. The Fund's net assets at the close of business on August 31, 1994
totaled $122,820,095. For the Fund's fiscal year ended August 31, 1994, the fee
payable to the Manager's predecessor under the Administrative Services Contract
was $208,699, of which $38,789 was voluntarily waived. For the Fund's fiscal
year ended August 31, 1995 the fee payable to the investment adviser under the
Investment Management Contract was $578,697, $48,044 of which was voluntarily
waived. The Fund's net assets at the close of business on August 31, 1995
totaled $164,255,522
The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its management fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
EXPENSE LIMITATION
The Manager has agreed pursuant to the Investment Management Contract, (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments are made to it on a
monthly basis. Subject to the obligations of the Manager to reimburse the Fund
for its excess expenses as described above, the Fund has, under the Investment
Management Contract, confirmed its obligation for payment of all its other
expenses, including all operating expenses, taxes, brokerage fees and
commissions, commitment fees, certain insurance premiums, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, Securities and Exchange Commission registration fees and
expenses, state securities laws registration fees and expenses, expenses of
preparing
and printing the Fund's prospectus for delivery to existing shareholders
and of printing application forms for shareholder accounts, and the fees and
reimbursements payable to the Manager under the Investment Management Contract
and the Distributor under the Shareholder Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. The Fund's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above.
MANAGEMENT OF THE FUND
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
14
<PAGE>
Steven W. Duff, 41 - President and Director of the Fund, is President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff was
formerly Director of Mutual Fund Administration at NationsBank which he was
associated with from June 1981 to August 1994. Mr. Duff is President and a
Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., and Short Term Income Fund, Inc., President of
Reich & Tang Government Securities Trust, President and Trustee of Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Pennsylvania Daily
Municipal Income Fund, Executive Vice President of Reich & Tang Equity Fund,
Inc., and President and Chief Executive Officer of Tax Exempt Proceeds Fund,
Inc.
Dr. W . Giles Mellon, 64 - Director of the Fund, is Professor of Business
Administration and Area Chairman of Economics in the Graduate School of
Management, Rutgers University with which he has been associated since 1966. His
address is Rutgers University Graduate School of Management, 92 New Street,
Newark, New Jersey 07102. Dr. Mellon is also a Director of California Daily Tax
Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax
Free Income Fund, Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., Reich & Tang Equity
Fund, Inc. and Short Term Income Fund, Inc. and a Trustee of Florida Daily
Municipal Income Fund, Institutional Daily Income Fund, Pennsylvania Daily
Municipal Income Fund and Reich & Tang Government Securities Trust.
Robert Straniere, 53 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His
address is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also
a Director of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Life Cycle Mutual Funds, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc. and
Short Term Income Fund, Inc. and a Trustee of Florida Daily Municipal Income
Fund, Institutional Daily Income Fund, Pennsylvania Daily Municipal Income Fund
and Reich & Tang Government Securities Trust.
Dr. Yung Wong, 56 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Limited Partnership (a general partner of a venture capital investment
firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich, Connecticut
06831. Dr. Wong is also a Director of California Daily Tax Free Income Fund,
Inc., Connecticut Daily Tax Free Income Fund, Inc., Daily Tax Free Income Fund,
Inc., Delafield Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., Reich & Tang Equity Fund, Inc., Short
Term Income Fund, Inc. and a Trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Pennsylvania Daily Municipal Income Fund, Reich
& Tang Government Securities Trust.
Molly Flewharty, 44 - Vice President of the Fund, is Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to September 1993. Ms. Flewharty is also Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Delafield
Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily Income
Fund, Michigan Daily Tax Free Income Fund, Inc., New York Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., Pennsylvania Daily
Municipal Income Fund, Reich & Tang Equity Fund, Inc., Reich & Tang Government
Securities Trust and Short Term Income Fund, Inc.
Lesley M. Jones, 47 - Vice President of the Fund, is Senior Vice President
of the Mutual Funds Division of the Manager since September 1993. Ms. Jones was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to September 1993. Ms. Jones is also a Vice President of
California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income
Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc., Florida
Daily Municipal Income Fund, Institutional Daily Income Fund, Michigan Daily Tax
Free Income Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York
Daily Tax Free Income Fund, Inc., Pennsylvania Daily Municipal Income Fund,
Reich & Tang Equity Fund, Inc., Reich & Tang Government Securities Trust and
Short Term Income Fund, Inc.
Dana E. Messina, 39 - Vice President of the Fund, is Executive Vice President of
the Mutual Funds Division of the Manager since January 1995 and Vice President
from September 1993 to January 1995. Ms. Messina was formerly Vice President of
Reich & Tang, Inc. with which she was associated from December
15
<PAGE>
1980 to September 1993. Ms. Messina is also Vice President of California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Cortland Trust, Inc., Daily Tax Free Income Fund, Inc., Florida Daily Municipal
Income Fund, Institutional Daily Income Fund, Michigan Daily Tax Free Income
Fund, Inc., New Jersey Daily Municipal Income Fund, Inc., New York Daily Tax
Free Income Fund, Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang
Equity Fund, Inc., Reich & Tang Government Securities Trust, Short Term Income
Fund, Inc., and Tax Exempt Proceeds Fund, Inc.
Bernadette N. Finn, 48 - Secretary of the Fund, is Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also
Secretary of California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax
Free Income Fund, Inc., Cortland Trust, Inc., Daily Tax Free Income Fund, Inc.,
Delafield Fund, Inc., Florida Daily Municipal Income Fund, Institutional Daily
Income Fund, Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., New York Daily Tax Free Income Fund, Inc.,
Pennsylvania Daily Municipal Income Fund, Tax Exempt Proceeds Fund, Inc. and a
Vice President and Secretary of Reich & Tang Government Securities Trust, Reich
& Tang Equity Fund, Inc. and Short Term Income Fund, Inc.
Richard De Sanctis, 39 - Treasurer of the Fund, is Assistant Treasurer of
NEIC since September 1993. Mr. De Sanctis was formerly Controller of Reich &
Tang, Inc., from January 1991 to September 1993 and Vice President and Treasurer
of Cortland Financial Group, Inc. and Vice President of Cortland Distributors,
Inc. from 1989 to December 1990. Mr. De Sanctis is also Treasurer of California
Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free Income Fund, Inc.,
Daily Tax Free Income Fund, Inc., Florida Daily Municipal Income Fund,
Institutional Daily Income Fund, Michigan Daily Tax Free Income Fund, Inc., New
Jersey Daily Municipal Income Fund, Inc., New York Daily Tax Free Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Reich & Tang Equity Fund, Inc.,
Reich & Tang Government Securities Trust, Short Term Income Fund, Inc., and Tax
Exempt Proceeds Fund, Inc., and is Vice President and Treasurer of Cortland
Trust, Inc.
The Fund paid an aggregate remuneration of $6,000 to its directors with respect
to the period ended August 31, 1995, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 for each Board of Directors
meeting attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. See Compensation Table below.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Aggregate Compensation Pension or Retirement Total Compensation from
Name of Person, from Registrant for Benefits Accrued as Estimated Annual Fund and Fund Complex
Position Fiscal Year Part of Fund Expenses Benefits upon Retirement Paid to Directors*
Dr. W. Giles Mellon, $2,000 0 0 $51,500
Director
Robert Straniere, $2,000 0 0 $51,500
Director
Dr. Young Wong, $2,000 0 0 $51,500
Director
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending August 31, 1995 (and, with respect to certain of
the funds in the Fund Complex, estimated to be paid during the fiscal year
ending August 31, 1995). The parenthetical number represents the number of
investment companies (including the Fund) from which such person receives
compensation that are considered part of the same Fund complex as the Fund,
because, among other things, they have a common investment advisor.
</TABLE>
16
<PAGE>
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Messrs. Battle Fowler LLP, 75 East 55th Street, New York, New
York 10022. Matters in connection with North Carolina law are passed upon by
Kennedy, Covington, Lobdell and Hickman, NationsBank Corporate Center, Suite
4200, Charlotte, North Carolina 28202.
McGladrey & Pullen LLP, 555 Fifth Avenue, New York, New York 10017, independent
certified public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted a
distribution and service plan (the "Plan") and, pursuant to the Plan, the Fund
has entered into a Distribution Agreement and a Shareholder Servicing Agreement
(with respect to Class A shares only) with the Reich & Tang Distributors L.P.,
(the "Distributor"), as distributor of the Fund's shares.
Reich & Tang Asset Management, Inc. serves as the sole general partner for
both Reich & Tang Asset Management L.P. and Reich & Tang Distributors L.P., and
Reich & Tang Asset Management L.P. serves as the sole limited partner of the
Distributor.
Effective December 9, 1994, a majority of the Fund's Board of Directors,
including independent directors, approved the creation of a second class of
shares of the Fund's outstanding common stock. In furtherance of this action,
the Board of Directors has reclassified the common stock of the Fund into Class
A and Class B shares. The Class A shares will be offered to investors who desire
certain additional shareholder services from Participating Organizations that
are compensated by the Fund's Manager and Distributor for such services. For its
services under the Shareholder Servicing Agreement (with respect to the Class A
shares only), the Distributor receives from the Fund a fee equal to .25% per
annum of the Fund's average daily net assets of the Class A shares of the Fund
(the "Shareholder Servicing Fee"). The fee is accrued daily and paid monthly and
any portion of the fee may be deemed to be used by the Distributor for payments
to Participating Organizations with respect to servicing their clients or
customers who are Class A shareholders of the Fund. The Class B shareholders
will not receive the benefit of such services from Participating Organizations
and, therefore, will not be assessed a Shareholder Servicing Fee.
The following information applies only to the Class A shares of the Fund.
For the Fund's fiscal year ended August 31, 1993, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled $226,163,
all of which was voluntarily waived. During the same period, the Manager made
total payments under the plan to or on behalf of Participating Organizations of
$334,616. For the Fund's fiscal year ended August 31, 1994, the amount payable
to the Distributor under the Distribution Plan and Shareholder Servicing
Agreement adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled
$268,644, $267,058 of which was voluntarily waived. During the same period, the
Manager's predecessor made total payments under the Plan to or on behalf of
Participating Organizations of $411,727. For the Fund's fiscal year ended August
31, 1995, the amount payable to the Distributor under the Distribution Plan and
Shareholder Servicing Agreement adopted thereunder pursuant to Rule 12b-1 under
the 1940 Act, totaled $359,894, of which $90,569 was voluntarily waived. During
the same period, the Manager made total payments under the plan to or on behalf
of Participating Organizations of $269,325. The excess of such payments over the
total payments the Manager's predecessor and Distributor received from the Fund
under the Plan represents distribution and servicing expenses funded by the
Manager from its own resources including the management fee.
Under the Distribution Agreement, the Distributor, for nominal consideration and
as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that, in addition to
the Shareholder Servicing Fee, the Fund will pay for (i) telecommunications
expenses including the cost of dedicated lines and CRT terminals, incurred by
the Participating Organizations and Distributor in carrying out their
obligations under the Shareholder Servicing Agreement with respect to the Class
A shares and (ii) preparing, printing and delivering the Fund's prospectus to
existing shareholders of the Fund and preparing and printing subscription
application forms for shareholder accounts.
17
<PAGE>
The Plan provides that the Manager may make payments from time to time from
their own resources, which may include the management fee, and past profits for
the following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A shares of the Fund; (ii) to
compensate certain Participating Organizations for providing assistance in
distributing the Fund's shares; and (iii) to pay the costs of printing and
distributing the Fund's prospectus to prospective investors, and to defray the
cost of the preparation and printing of brochures and other promotional
materials, mailings to prospective shareholders, advertising, and other
promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee with respect to Class A shares
and past profits for the purpose enumerated in (i) above. The Distributor will
determine the amount of such payments made pursuant to the Plan, provided that
such payments will not increase the amount which the Fund is required to pay to
the Manager or the Distributor for any fiscal year under the Investment
Management Contract or the Shareholder Servicing Agreement in effect for that
year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan was approved by the shareholders of the Fund on December 16, 1992. The
continuance of the Plan was most recently approved at a meeting of the Board of
Directors held on April 7, 1995. The Plan provides that it will remain in affect
until August 31, 1996, and thereafter may continue in effect for successive
annual periods commencing September 1, provided it is approved by the Class A
shareholders or by the Board of Directors, including a majority of directors who
are not interested persons of the Fund and who have no direct or indirect
interest in the operation of the Plan or in the agreements related to the Plan.
The Plan further provides that it may not be amended to increase materially the
costs which may be spent by the Fund for distribution pursuant to the Plan
without shareholder approval, and the other material amendments must be approved
by the directors in the manner described in the preceding sentence. The Plan may
be terminated at any time by a vote of a majority of the disinterested directors
of the Fund or the Fund's Class A shareholders.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on April 18,
1990 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund's Board of Directors is
authorized to divide the shares into separate series of stock, one for each of
the portfolios that may be created. Each share of any series of shares when
issued will have equal dividend, distribution and liquidation rights within the
series for which it was issued and each fractional share has those rights in
proportion to the percentage that the fractional share represents of a whole
share. Shares of all series have identical voting rights, except where, by law,
certain matters must be approved by a majority of the shares of the unaffected
series. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value, at the option of the
shareholder. The Fund is subdivided into two classes of common stock, Class A
and Class B. Each share, regardless of class, will represent an interest in the
same portfolio of investments and will have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that: (i) the
Class A and Class B shares will have different class designations; (ii) only the
Class A shares will be assessed a service fee pursuant to the Rule 12b-1
Distribution and Service Plan of the Fund of .25% of the Class A shares' average
daily net assets; (iii) only the holders of the Class A shares would be entitled
to vote on matters pertaining to the Plan and any related agreements in
accordance with provisions of Rule 12b-1; and (iv) the exchange privilege will
permit stockholders to exchange their shares only for shares of the same class
of an investment company that participates on an exchange privilege program with
the Fund. Payments that are made under the Plan will be calculated and charged
daily to the appropriate class prior to determining daily net asset value per
share and dividends/distributions.
18
<PAGE>
On November 30, 1995 there were 171,763,099 shares of the Fund outstanding. As
of November 30, 1995, the amount of shares owned by all officers and directors
of the Fund, as a group, was less than 1% of the outstanding shares. Set forth
below is certain information as to persons who owned 5% or more of the Fund's
outstanding shares as of November 30, 1995:
Nature of
Name and address % of Class Ownership
Wachovia Bank 46.31% Record
of North Carolina
P.O. Box 3099
Winston-Salem, N.C. 27102
North Carolina 05.40% Record
Omnibus Account
c/o Reich & Tang
600 Fifth Avenue
New York, N.Y. 10020
Under its amended Articles of Incorporation the Fund has the right to redeem for
cash shares of stock owned by any shareholder to the extent and at such times as
the Fund's Board of Directors determines to be necessary or appropriate to
prevent an undue concentration of stock ownership which would cause the Fund to
become a "personal holding company" for Federal income tax purposes. In this
regard, the Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the revised
investment advisory contracts with respect to a particular class or series of
stock, (c) for approval of the Fund's distribution agreement with respect to a
particular class or series of stock, and (d) upon the written request of holders
of shares entitled to cast not less than 25% of all the votes entitled to be
cast at such meeting. Annual and other meetings may be required with respect to
such additional matters relating to the Fund as may be required by the 1940 Act,
including the removal of Fund director(s) and communication among shareholders,
any registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of the shareholders called for the purpose of
considering the election or re-election of such Director or of a successor to
such Director, and until the election and qualification of his or her successor,
elected at such a meeting, or until such Director sooner dies, resigns, retires
or is removed by the vote of the shareholders.
FEDERAL INCOME TAXES
The Fund has elected to qualify under the Code, and under North Carolina law as
a "regulated investment company" that distributes "exempt-interest dividends".
The Fund intends to continue to qualify for regulated investment company status
so long as such qualification is in the best interests of its shareholders. Such
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the applicable provisions
of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its tax-exempt interest income, net of certain deductions.
Exempt-interest dividends, as defined in the Code, are dividends or any part
thereof (other than capital gain dividends) paid by the Fund that are
attributable to interest on obligations, the interest on which is exempt from
regular Federal income tax, and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by the Fund during any taxable year that qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends during the year.
Exempt-interest dividends are to be treated by the Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code.
However, a shareholder is advised to consult his tax
19
<PAGE>
advisors with respect to whether exempt-interest dividends retain the
exclusion under Section 103 of the Code if such shareholder would be treated as
a "substantial user" or "related person" under Section 147(a) of the Code with
respect to some or all of the "private activity" bonds, if any, held by the
Fund. If a shareholder receives an exempt-interest dividend with respect to any
share and such share has been held for six months or less, then any loss on the
sale or exchange of such share will be disallowed to the extent of the amount of
such exempt-interest dividend. The Code provides that interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities such
as shares of the Fund is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the period
an investor holds shares of the Fund. For Social Security recipients, interest
on tax-exempt bonds, including exempt-interest dividends paid by the Fund, is to
be added to adjusted gross income for purposes of computing the amount of social
security benefits includible in gross income. The amount of such interest
received will have to be disclosed on the shareholders' Federal income tax
returns. Taxpayers other than corporations are required to include as an item of
tax preference for purposes of the Federal alternative minimum tax all
tax-exempt interest on "private activity" bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business) (other than Section 501(c)(3) bonds) issued after August 7, 1986.
Thus, this provision will apply to the portion of the exempt-interest dividends
from the Fund's assets, that are attributable to such post-August 7, 1986
private activity bonds, if any of such bonds are acquired by the Fund.
Corporations are required to increase their alternative minimum taxable income
for purposes of calculating their alternative minimum tax liability by 75% of
the amount by which the adjusted current earnings (which will include tax-exempt
interest) of the corporation exceeds the alternative minimum taxable income
(determined without this item). Further, interest on the Municipal Obligations
is includable in a 0.12% additional corporate minimum tax imposed by the
Superfund Amendments and Reauthorization Act of 1986. In addition, in certain
cases, Subchapter S corporations with accumulated earnings and profits from
Subchapter C years are subject to a minimum tax on excess "passive investment
income" which includes tax-exempt interest.
Although it is not intended, it is possible that the Fund may realize
short-term or long-term capital gains or losses from its portfolio transactions.
The Fund may also realize short-term or long-term capital gains upon the
maturity or disposition of securities acquired at discounts resulting from
market fluctuations. Short-term capital gains will be taxable to shareholders as
ordinary income when they are distributed. Any net capital gains (the excess of
its net realized long-term capital gain over its net realized short-term capital
loss) will be distributed annually to the Fund's shareholders. The Fund will
have no tax liability with respect to distributed net capital gains and the
distributions will be taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held Fund shares. However, Fund
shareholders who at the time of such a net capital gain distribution have not
held their Fund shares for more than 6 months, and who subsequently dispose of
those shares at a loss, will be required to treat such loss as a long-term
capital loss to the extent of the net capital gain distribution. Distributions
of net capital gain will be designated as a "capital gain dividend" in a written
notice mailed to the Fund's shareholders not later than 60 days after the close
of the Fund's taxable year. Preferential treatment may be available for net
capital gains by placing a 28% ceiling on the marginal tax rate applicable to
net capital gains realized by individuals.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
its net long-term capital gain over its net short-term capital loss) for each
taxable year. The Fund will be subject to Federal income tax on any
undistributed investment company taxable income. To the extent such income is
distributed it will be taxable to shareholders as ordinary income. Expenses paid
or incurred by the Fund will be allocated between tax-exempt and taxable income
in the same proportion as the amount of the Fund's tax-exempt income bears to
the total of such exempt income and its gross income (excluding from gross
income the excess of capital gains over capital losses). If the Fund does not
distribute at least 98% of its ordinary income and 98% of its capital gain net
income for a taxable year, the Fund will be subject to a nondeductible 4% excise
tax on the excess of such amounts over the amounts actually distributed.
If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund generally is required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund.
20
<PAGE>
With respect to the variable rate demand instruments, including participation
certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner thereof and the interest on the underlying
Municipal Obligations will be tax-exempt to the Fund. Counsel has pointed out
that the Internal Revenue Service has announced that it will not ordinarily
issue advance rulings on the question of ownership of securities or
participation interests therein subject to a put and, as a result, the Internal
Revenue Service could reach a conclusion different from that reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure. Many important changes were made to the Federal income
tax system by the Revenue Reconciliation Act of 1993 (P.L. 103-66), including an
increase in marginal tax rates. P.L. 99-514 provided a unified state volume
limitation for many types of tax-exempt bonds and revised current arbitrage
restrictions.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as the Municipal Obligations and to tax such
bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Municipal Obligations in
accordance with Section 103 of the Code.
NORTH CAROLINA INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code and has filed with the North
Carolina Department of Revenue its election to be treated as a regulated
investment company, exempt interest dividends received from the Fund need not be
included in North Carolina taxable income by shareholders of the Fund subject to
North Carolina taxation to the extent such dividends represent interest from
obligations issued by North Carolina and political subdivisions of North
Carolina. Dividends with respect to interest on obligations from states other
than North Carolina and its political subdivisions are required to be added to
Federal taxable income in calculating North Carolina taxable income. The portion
of distributions from the Fund that represents capital gain is reportable for
North Carolina income tax purposes as capital gain income and not dividend
income. Exempt-interest dividends correctly identified by the Fund as derived
from obligations of Puerto Rico and the Virgin Islands, as well as other types
of obligations that North Carolina is prohibited from taxing under the
Constitution or laws of the United States of America or the constitution or laws
of North Carolina ("Territorial Municipal Obligations") should be exempt from
the North Carolina income taxation provided the Fund complies with North
Carolina law.
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian for the Fund's cash and securities, and is the transfer
agent and dividend disbursing agent for shares of the Fund. The transfer agent
and custodian does not assist in, and is not responsible for, investment
decisions involving assets of the Fund.
21
<PAGE>
DESCRIPTION OF RATINGS*
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. (_____): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF
STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM LOANS:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S TWO HIGHEST DEBT RATINGS:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
TWO HIGHEST COMMERCIAL PAPER RATINGS:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
* As described by the rating agencies.
22
<PAGE>
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST COMMERCIAL PAPER RATINGS:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
23
<PAGE>
<TABLE>
<CAPTION>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
1. If Your Taxable Income Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
50,001- 75,001- 100,001- 335,001- 10,000,001- 15,000,000- 18,333,334-
Corporate 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
______________________________________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Federal
Tax 25.0% 34.0% 39.0% 34.0% 35.0% 38.0% 35.0%
Bracket
______________________________________________________________________________________________________________
State
Tax 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Bracket
______________________________________________________________________________________________________________
Combined
Tax 30.8% 39.1% 43.7% 39.1% 40.0% 42.8% 40.1%
Bracket
______________________________________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
______________________________________________________________________________________________________________
Tax Equivalent Taxable Investment Yield
Exempt Requires to Match Tax Exempt Yield
Yield
______________________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C> <C> <C>
2.0% 2.89 3.28 3.55 3.28 3.34 3.50 3.34
______________________________________________________________________________________________________________
2.5% 3.61 4.11 4.44 4.11 4.17 4.37 4.17
______________________________________________________________________________________________________________
3.0% 4.34 4.93 5.33 4.93 5.00 5.25 5.00
______________________________________________________________________________________________________________
3.5% 5.06 5.75 6.22 5.75 5.84 6.12 5.84
______________________________________________________________________________________________________________
4.0% 5.78 6.57 7.11 6.57 6.67 6.99 6.67
______________________________________________________________________________________________________________
4.5% 6.50 7.39 8.00 7.39 7.50 7.87 7.50
______________________________________________________________________________________________________________
5.0% 7.23 8.21 8.89 8.21 8.34 8.74 8.34
______________________________________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
24
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL TAXABLE EQUIVALENT YIELD TABLE
______________________________________________________________________________________________________________
1. If Your Taxable Income Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Single 23,500- 56,550- 60,001- 117,950- 256,500
Return 56,549 60,000 117,949 256,499 and over
______________________________________________________________________________________________________________
Joint 39,000- 94,250- 100,001- 143,600- 256,500
Return 94,249 100,000 143,599 256,499 and over
______________________________________________________________________________________________________________
2. Then Your Combined Income Tax Bracket Is . . .
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Federal
Tax Bracket 28.0% 31.0% 31.0% 36.0% 39.6%
______________________________________________________________________________________________________________
State
Tax Bracket 7.0% 7.0% 7.75% 7.75% 7.75%
______________________________________________________________________________________________________________
Combined
Tax Bracket 36.0% 35.8% 36.3% 41.0% 44.3%
______________________________________________________________________________________________________________
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
______________________________________________________________________________________________________________
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
______________________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C>
2.0% 2.99% 3.12% 3.14% 3.39% 3.59%
______________________________________________________________________________________________________________
2.5% 3.73% 3.90% 3.93% 4.23% 4.49%
______________________________________________________________________________________________________________
3.0% 4.48% 4.68% 4.71% 5.08% 5.38%
______________________________________________________________________________________________________________
3.5% 5.23% 5.45% 5.50% 5.93% 6.28%
______________________________________________________________________________________________________________
4.0% 6.97% 6.23% 6.28% 6.78% 7.18%
______________________________________________________________________________________________________________
4.5% 6.72% 7.01% 7.07% 7.62% 8.08%
______________________________________________________________________________________________________________
5.0% 7.47% 7.79% 7.86% 8.47% 8.97%
______________________________________________________________________________________________________________
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
25
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
INDEPENDENT AUDITOR'S REPORT
===============================================================================
The Board of Directors and Shareholders
North Carolina Daily Municipal Income Fund, Inc.
We have audited the accompanying statement of net assets of North Carolina Daily
Municipal Income Fund, Inc. as of August 31, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the selected financial
information for each of the three years in the period then ended and the period
from September 10, 1991 (Commencement of Operations) to August 31, 1992. These
financial statements and selected financial information are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of August 31, 1995, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of North Carolina Daily Municipal Income Fund, Inc. as of August 31,
1995, the results of its operations, the changes in its net assets and the
selected financial information for the periods indicated, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
September 26, 1995
26
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings(a)
-----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Tax Exempt Investments (10.87%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,100,000 Cleveland County, NC Refunding GO Valorem Property Tax
FGIC Insured 06/01/96 3.62% $ 1,111,202 Aaa AAA
1,750,000 Craven County, NC BAN (b) 09/13/95 4.06 1,750,488
850,000 Cumberland County, NC GO
MBIA Insured 02/01/96 3.50 856,721 Aaa AAA
3,608,000 East Central Water and Sewer Harnett County (b)
FHA Insured 10/11/95 4.75 3,608,152
1,585,000 Harnett County, NC COPS
AMBAC Insured 12/01/95 4.90 1,585,000 Aaa AAA
1,000,000 High Point, NC BAN 03/13/96 3.45 1,003,603 MIG-1 SP-1+
425,000 High Point, NC BAN 03/13/96 3.84 425,627 MIG-1 SP-1+
1,500,000 High Point, NC Refunding Bond 04/01/96 4.14 1,499,961 Aa AA
1,000,000 North Carolina State Public Improvement Bonds (b)
Escrowed In Treasuries 08/01/96 3.66 1,023,987
1,000,000 Pitt County, NC Revenue
(Pitt County Memorial Hospital) 12/01/95 3.49 1,005,220 Aa AA-
455,000 Robeson County, NC GO RB
AMBAC Insured 02/01/96 3.47 456,656 Aaa AAA
1,525,000 South Camden Water & Sewer District,
NC GO Water BAN
FHA Insured 09/20/95 3.93 1,525,077 Aaa AAA
2,000,000 Wake County, NC Refunding Bond 04/01/96 4.23 1,997,971 Aaa AAA
---------- ----------
17,798,000 Total Other Tax Exempt Investments 17,849,665
- ----------- ----------
<CAPTION>
Other Variable Rate Demand Instruments (c) (67.37%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,400,000 Alamance County, NC (SCI Manufacturing)
LOC PNC Bank 04/01/15 3.45% $ 4,400,000 MIG-1
3,000,000 Beaufort, NC PCRB (Texas Gulf Incorporated) - Series 1985
LOC Societe Generale 12/01/00 3.95 3,000,000 Aaa
900,000 Bladen County, NC (Harriet and Henderson Yarns)
LOC Nations Bank 12/01/03 3.85 900,000 A1+
2,000,000 Burke County, NC PCFA (Jobs Project)
LOC Wachovia Bank & Trust Company, N.A. 06/01/02 3.80 2,000,000 A1+
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
$ 3,500,000 Gaston County, NC Industrial Facilities PCRB
(Allibert, Incorporated Project) Series 1987A (b)
LOC Credit Lyonnais 01/01/12 3.75% $ 3,500,000
260,000 Gaston County, NC PCFA (Keystone Carbon Company)
LOC Nations Bank 09/01/00 3.85 260,000 P1
5,000,000 Granville County, NC Industrial Facilities PCFA
(Mayville Metal Products Project)
LOC PNC Bank 05/23/20 3.85 5,000,000 P1 A1
1,400,000 Greensboro, NC COPS (Greensboro Coliseum) - Series A 12/01/15 3.40 1,400,000 A1+
1,500,000 Guilford County, NC (Bonset America)
LOC Dai-Ichi Kangyo Bank, Ltd. 05/01/09 3.85 1,500,000 P1 A1+
3,000,000 Harnett County Industrial Facilities PCFA IDRB
(Edwards Brothers Incorporated Project) (b)
LOC Wachovia Bank & Trust Company, N.A. 01/01/07 3.85 3,000,000
2,700,000 Haywood City Industrial Facilities PCR Finance Authority
(Champion International)
LOC Bank of Austria 03/01/20 3.55 2,700,000 VMIG-1 A1+
2,500,000 Iredell County, NC (Jet Corr Incorporated) (b)
LOC National Bank of Canada 09/01/99 3.85 2,500,000
1,100,000 Iredell County, NC Industrial Facilities PCFA RB
(Purina Mills Incorporated)
LOC Bank of Nova Scotia 07/01/20 3.65 1,100,000 A1+
1,000,000 Lenoir County Industrial Facilities PCFA Resource Recovery RB
(Carolina Energy, LP Project)
LOC Bank of Tokyo, Ltd. 07/01/22 3.85 1,000,000 VMIG-1 A1
3,800,000 Lenoir County, NC Industrial Facilities
(West Company of Nebraska Incorporated) - Series 1985
LOC Dresdner Bank A.G. 10/01/05 3.65 3,800,000
2,000,000 Lincoln County, NC Industrial Facilities PCFA RB (General Marble)
LOC National Bank of Canada 09/01/00 3.85 2,000,000 P1 A1
1,500,000 Mecklenburg County, NC (Otto Industry)
LOC Rabobank Nederland 10/01/08 3.85 1,500,000 P1
2,000,000 Mecklenburg County, NC IDRB (Virkler Company) (b)
LOC First Union National Bank 12/01/04 3.90 2,000,000
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
28
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 2,000,000 Moore County, NC (Perdue Farm Project)
LOC Rabobank Nederland 06/01/10 3.60% $ 2,000,000 P1 A1+
2,900,000 North Carolina Education Facilities (Davidson College Project)(b) 12/01/04 3.70 2,900,000
2,700,000 North Carolina Education Facilties (Guilford College Project)
LOC Wachovia Bank & Trust Company, N.A. 09/01/23 3.50 2,700,000 VMIG-1 A1+
2,525,000 North Carolina Education Facilities Finance Agency RB
(Wake Forest University Project) 01/01/09 3.60 2,525,000 VMIG-1
8,600,000 North Carolina Medical Care Commission (Carol Woods)
LOC Bank of Scotland 04/01/21 3.40 8,600,000 VMIG-1
1,000,000 North Carolina Medical Care Commission - Series 1991B
LOC First Union National Bank 10/01/13 3.35 1,000,000 VMIG-1
2,400,000 North Carolina Medical Care Commission HRB
(NC Baptist Hospitals Project) - Series 1992B 06/01/22 3.80 2,400,000 VMIG-1 A1+
2,000,000 North Carolina Medical Care Commission HRB
(Pooled Finance) - Series 1991A
LOC Dai-Ichi Kangyo Bank, Ltd. 10/01/20 3.40 2,000,000 VMIG-1 A1
3,200,000 North Carolina Medical Care Commission Variable Rate Demand
HRB (Park Ridge Hospital Project)
LOC Nations Bank 08/15/18 3.65 3,200,000 A1
1,000,000 Pasquotanic County Industrial Facilities PCFA IDRB
(JW Jones Lumber Company, Incorporated Project) (b)
LOC Wachovia Bank & Trust Company, N.A. 10/01/10 3.88 1,000,000
3,600,000 Person County, NC PCRB
(Carolina Power and Light Solid Waste Disposal) - Series 1986
LOC Fuji Bank, Ltd. 11/01/16 3.70 3,600,000 P1
1,000,000 Piedmont Triad, NC Airport Authority
(The Cessna Aircraft Company)
LOC Nations Bank 09/01/12 3.85 1,000,000 A1
900,000 Randolph County, NC Industrial Facilities & PCFA (b)
LOC Bank One Ohio 09/01/05 3.90 900,000
3,000,000 Richmond County, NC Industrial Facilities & PCFA
(Bibb Company Project)
LOC Citibank 12/01/03 3.70 3,000,000 A1
1,750,000 Samson County, NC PCFA (Dubose Strapping)
LOC First Union National Bank 02/01/99 3.90 1,750,000 P1
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
29
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Other Variable Rate Demand Instruments (c) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7,000,000 University of North Carolina
Chapel Hill School of Medicine Ambulatory Care Clinic 07/01/12 3.60% $ 7,000,000 A1+
1,000,000 Union County, NC Facilities Pollution Control (Square D)
LOC Morgan Guaranty 03/01/03 3.70 1,000,000 VMIG-1
4,800,000 Wake County, NC Industrial Facilities PCFA
(Carolina Power and Light)
LOC Sumitomo Bank, Ltd. 03/01/17 3.65 4,800,000 VMIG-1
10,600,000 Wake County, NC Industrial Facilities PCFA
(Carolina Power and Light) - Series A
LOC Credit Suisse 05/01/15 3.50 10,600,000 P1 A1+
2,300,000 Warren County, NC Industrial Facilities
(Glen Raven Mills Project) (b)
LOC Wachovia Bank & Trust Company, N.A. 05/01/06 3.85 2,300,000
2,800,000 Winston-Salem, NC COPS - Series 1988 07/01/09 3.60 2,800,000 A1+
500,000 Winston-Salem, NC GO Bond 06/01/07 3.70 500,000 VMIG-1 A1+
1,525,000 Yancey County, NC Industrial Facilities
(Avondale Mills Incorporated Project)
LOC Suntrust 01/01/97 3.75 1,525,000 P1
- ----------- ----------
110,660,000 Total Other Variable Rate Demand Instruments 110,660,000
- ----------- -----------
<CAPTION>
Put Bonds (7.43%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,000,000 Mecklenburg County, NC Industrial Facilities PCFA
(Ecolaire Combustion Products)
LOC Union Bank of Switzerland 02/01/96 3.80% $ 4,000,000 P1 A1+
2,500,000 North Carolina Industrial Facilities PCFA
(GVK America Incorporated)
LOC Union Bank of Switzerland 12/01/95 5.00 2,500,000 AAA
2,700,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Merck & Company Incorporated Project) 12/01/95 4.10 2,700,000 Aaa AAA
3,000,000 Puerto Rico Industrial Medical & Environmental PCFA RB
(Abbot Laboratories) 03/01/96 5.10 3,000,000 Aaa AAA
- ----------- -----------
12,200,000 Total Put Bonds 12,200,000
---------- -----------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
30
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS (CONTINUED)
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
Ratings (a)
----------------
Face Maturity Value Standard
Amount Date Yield (Note 1) Moody's & Poor's
------ ---- ----- -------- ------- ------
Revenue Bonds (1.05%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 700,000 Northern Hospital District, Surry County
U.S. Government Guaranteed 10/01/95 3.96% $ 717,122 Aaa
1,000,000 Wilmington, NC Water RB 06/01/96 3.77 1,011,990 A1 A+
---------- ----------
1,700,000 Total Revenue Bonds 1,729,112
---------- ----------
<CAPTION>
Tax Exempt Commercial Paper (16.79%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,000,000 County of Winston Salem, NC (Water & Sewer System) 09/14/95 3.10% $ 3,000,000 VMIG-1 A1+
1,275,000 County of Winston, NC
(Summit Square Garden Apartment Project) - Series 1989
FHA Insured 11/08/95 3.55 1,275,000 AAA
3,000,000 North Carolina Eastern Municipal Power Agency
LOC Industrial Bank of Japan, Ltd. 09/06/95 3.60 3,000,000 A1
1,075,000 North Carolina Eastern Municipal Power Agency
LOC Industrial Bank of Japan, Ltd. 09/06/95 3.85 1,075,000 A1
6,726,000 North Carolina Eastern Municipal Power Agency
LOC Industrial Bank of Japan, Ltd. 09/07/95 3.80 6,726,000 A1
3,000,000 North Carolina Eastern Municipal Power Agency - Series 1988B
LOC Morgan Guaranty & Union Bank of Switzerland 09/07/95 3.05 3,000,000 A1+
2,000,000 North Carolina Eastern Municipal Power Agency - Series 1988B
LOC Morgan Guaranty & Union Bank of Switzerland 10/05/95 2.90 2,000,000 A1+
1,500,000 North Carolina Eastern Municipal Power Agency - Series 1988B
LOC Morgan Guaranty & Union Bank of Switzerland 10/18/95 3.45 1,500,000 A1+
5,000,000 North Carolina Municipal Power Agency
Number 1 Catawba Electric RB 12/15/95 3.50 5,000,000 P1 A1
1,000,000 Wake County, NC Industrial Facilities PCRB
(Carolina Power & Light)
LOC Fuji Bank, Ltd. 09/07/95 3.75 1,000,000 P1 A1
- ----------- -----------
27,576,000 Total Tax Exempt Commercial Paper 27,576,000
- ----------- -----------
Total Investments (103.51%)(Cost $170,014,777+) 170,014,777
Liabilities in Excess of Cash and Other Assets (-3.51%) ( 5,759,255)
-----------
Net Assets (100.00%), 164,260,263 Shares Outstanding - Class A (Note 3) 164,255,522
===========
Net Asset Value, offering and redemption price per share $ 1.00
===========
+ Aggregate cost for federal income tax purposes is identical.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
31
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AUGUST 31, 1995
===============================================================================
FOOTNOTES:
(a) The ratings noted for variable rate demand instruments are those of the
bank whose letter of credit secures such instruments or the guarantor of
the bond. P1 and A1+ are the highest ratings assigned for tax exempt
commercial paper.
(b) Securities that are not rated which the Fund's Board of Directors has
determined to be of comparable quality to those rated securities in which
the Fund invests.
(c) Securities payable on demand at par including accrued interest (usually
with seven days notice) and unconditionally secured as to principal and
interest by a bank letter of credit. The interest rates are adjustable and
are based on bank prime rates or other interest rate adjustment indices.
The rate shown is the rate in effect at the date of this statement.
<TABLE>
<CAPTION>
KEY:
<S> <C> <C> <C> <C> <C>
BAN = Bond Anticipation Note IDRB = Industrial Development Revenue Bond
CI = Certificate of Indebtedness PCFA = Pollution Control Finance Authority
COPS = Certificate of Participations PCR = Pollution Control Revenue
GO = General Obligation PCRB = Pollution Control Revenue Bond
HRB = Hospital Revenue Bond RB = Revenue Bond
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
32
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
AUGUST 31, 1995
===============================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Income:
Interest.................................................................... $ 5,472,977
--------------
Expenses: (Note 2)
Investment management fee................................................... 578,697
Shareholder servicing fee (Class A)......................................... 359,894
Administration fee.......................................................... 289,349
Custodian, shareholder servicing and related shareholder expenses........... 123,510
Legal, compliance and filing fees........................................... 33,731
Audit and accounting........................................................ 53,795
Directors' fees............................................................. 6,393
Amortization of organization expenses....................................... 9,001
Other....................................................................... 7,481
--------------
Total expenses.......................................................... 1,461,851
Less: Fees waived (Note 2).................................................. ( 341,866)
--------------
Net expenses.......................................................... 1,119,985
--------------
Net investment income........................................................... 4,352,992
--------------
<CAPTION>
REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments......................................... 498
--------------
Increase in net assets from operations.......................................... $ 4,353,490
==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
33
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
<TABLE>
<CAPTION>
Year Year
Ended Ended
August 31, 1995 August 31, 1994
--------------- ---------------
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income.......................................... $ 4,352,992 $ 1,991,239
Net realized gain (loss) on investments........................ 498 268
-------------- --------------
Increase in net assets from operations............................. 4,353,490 1,991,507
Dividends to shareholders from net investment income:
Class A........................................................ ( 4,328,632)* ( 1,991,239)*
Class B........................................................ ( 24,360)* --
Capital share transactions (Note 3):
Class A........................................................ 41,434,929 29,525,848
Class B........................................................ -- --
------------- --------------
Total increase (decrease).................................... 41,435,427 29,526,116
Net assets:
Beginning of year.............................................. 122,820,095 93,293,979
------------- --------------
End of year.................................................... $ 164,255,522 $ 122,820,095
============= ==============
* Designated as exempt-interest dividends for federal income tax purposes.
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
34
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. Summary of Accounting Policies.
North Carolina Daily Municipal Income Fund, Inc. is a no-load, non-diversified,
open-end management investment company registered under the Investment Company
Act of 1940. The Fund has two classes of stock authorized, Class A and Class B.
The Class A shares are subject to a service fee pursuant to the Distribution and
Service Plan. The Class B shares are not subject to a service fee. In all other
respects, the Class A and Class B shares represent the same interest in the
income and assets of the Fund. Distribution of Class B shares commenced December
12, 1994. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles for investment companies as follows:
a) Valuation of Securities -
Investments are valued at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any discount or premium is
amortized on a constant basis to the maturity of the instrument. The
maturity of variable rate demand instruments is deemed to be the longer of
the period required before the Fund is entitled to receive payment of the
principal amount or the period remaining until the next interest rate
adjustment.
b) Federal Income Taxes -
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its tax exempt and taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Dividends and Distributions -
Dividends from investment income (excluding capital gains and losses, if
any, and amortization of market discount) are declared daily and paid
monthly. Distributions of net capital gains, if any, realized on sales of
investments are made after the close of the Fund's fiscal year, as declared
by the Fund's Board of Directors.
d) General -
Securities transactions are recorded on a trade date basis. Interest income
is accrued as earned. Realized gains and losses from securities
transactions are recorded on the identified cost basis.
2. Investment Management Fees and Other Transactions with Affiliates.
Under the Investment Management Contract, the Fund pays an investment management
fee to Reich & Tang Asset Management L.P. (the Manager) at the annual rate of
.40% of the Fund's average daily net assets. The Manager is required to
reimburse the Fund for its expenses (exclusive of interest, taxes, brokerage,
and extraordinary expenses) to the extent that such expenses, including the
investment management and the shareholder servicing and administration fees, for
any fiscal year exceed the limits on investment company expenses prescribed by
any state in which the Fund's shares are qualified for sale. No such
reimbursement was required for the year ended August 31, 1995.
Pursuant to an Administrative Services Contract the Fund pays to the Manager an
annual fee of .20% of the Fund's average daily net assets.
- -------------------------------------------------------------------------------
35
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
2. Investment Management Fees and Other Transactions with Affiliates
(Continued).
Pursuant to a Distribution and Service Plan adopted under Securities and
Exchange Commission Rule 12b-1, the Fund and Reich & Tang Distributors L.P. (the
Distributor) have entered into a Distribution Agreement and a Shareholder
Servicing Agreement only with respect to the Class A shares of the Fund. For its
services under the Shareholder Servicing Agreement, the Distributor receives
from the Fund with respect only to the Class A shares, a fee equal to .25% of
the Fund's average daily net assets. There were no additional expenses borne by
the Fund pursuant to the Distribution Plan.
During the year ended August 31, 1995, the Manager and the Distributor
voluntarily waived investment management fees, administration fees and
shareholder servicing fees of $48,044, $203,253 and $90,569, respectively.
Fees are paid to Directors who are unaffiliated with the Manager on the basis of
$1,000 per annum plus $250 per meeting attended.
Included in the Statement of Operations under the caption "Custodian,
shareholder servicing and related shareholder expenses" are fees of $38,487 paid
to Fundtech Services L.P., an affiliate of the Manager, as servicing agent for
the Fund.
3. Capital Stock.
At August 31, 1995, 20,000,000,000 shares of $.001 par value stock were
authorized and capital paid in amounted to $164,260,263. Transactions in capital
stock, all at $1.00 per share, were as follows:
<TABLE>
<CAPTION>
Class A
Year Year
Ended Ended
August 31, 1995 August 31, 1994
--------------- ---------------
<S> <C> <C>
Sold............................................... 621,223,319 394,716,582
Issued on reinvestment of dividends................ 2,303,648 1,413,037
Redeemed........................................... ( 582,092,038) ( 366,603,771)
---------------- ---------------
Net increase (decrease)............................ 41,434,929 29,525,848
================ ===============
<CAPTION>
Class B
December 12, 1994
(Commencement of Operations)
to August 31, 1995
------------------
<S> <C>
Sold............................................... 5,002,449
Issued on reinvestment of dividends................ 24,108
Redeemed........................................... ( 5,026,557)
----------------
Net increase (decrease)............................ -0-
================
</TABLE>
- -------------------------------------------------------------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
===============================================================================
4. Sales of Securities.
Accumulated undistributed realized losses at August 31, 1995 amounted to $4,741.
Such amount represents tax basis capital losses which may be carried forward to
offset future capital gains. Such losses expire August 31, 2000.
5. Concentration of Credit Risk.
The Fund invests primarily in obligations of political subdivisions of the State
of North Carolina and, accordingly, is subject to the credit risk associated
with the non-performance of such issuers. Approximately 68% of these investments
are further secured, as to principal and interest, by letters of credit issued
by financial institutions. The Fund maintains a policy of monitoring its
exposure by reviewing the credit worthiness of the issuers, as well as that of
the financial institutions issuing the letters of credit, and by limiting the
amount of holdings with letters of credit from one financial institution.
6. Selected Financial Information.
Reference is made to page 3 of the prospectus for the Selected Financial
Information
37
